PRJECT ANALYSIS UNDER CERTAINTY
ANSWERS TO REVIEW INQUIRIES
6. 1 Describe and define the conditions: net present value, inner rate of return, customized internal level of return, accounting level of come back, and repayment period.
six. 2 Make clear the role of ‘certainty' in job evaluation decisions.
6. 3 Assume that Anvil Inc. has estimated the subsequent annual info for the development of a new merchandise, Ranch Palm:
EOY 0 EOY 1 EOY 2 EOY three or more EOY 4 EOY your five
Cash Runs -14, two hundred and fifty 3, 700 2, 980 6, 540 7, 810 6, 320 Accounting
Salary 2, 870 2, 540 5, 890 6, 720 5, 780
Required charge of returning: 14%pa.
Reinvestment rate of return: 12% pa.
(a) For Hacienda Hand estimate NPV, IRR, MIRR, ARR, and repayment period. (b) Based on the calculations in part (a), make a suggestion to Anvil's management about the introduction of Farm Hand.
six. 4 Regarding investment decisions, explain the terms: mutual exclusivity, replacement unit decisions, retirement decisions.
six. 5 Discuss the difference in the usage of the terms ‘ asset replacement' and ‘asset replication'.
6. 6 The formula to attain an NPV for asset replication in perpetuity is definitely:
Explain how this formulation works, and have absolutely how it could be set up being a generic calculations within an Surpass spreadsheet.
6th. 7 Assume that White Knuckle Airlines Incorporation. operates a regional fifty-seat jet plane fleet. Light Knuckle wants that you will see a constant with regard to this type of air travel service, and that the model of plane employed will stay in development for the foreseeable future. Light Knuckle offers predicted the set of detailed cash runs shown in Table 6. 11 for each aircraft.
Desk 6. 11. Operational cash flows
12 months Annual Net Cash Moves $M Salvage Value $M 0 twenty-three. 00 (cost)
1 4. 865 21. zero 2 a few. 956 18. 7 3 2 . 875 16. 1 4 2 . 115 16. 3 a few 1 . 875 12. 8
In the event White Knuckle Inc. contains a required rate of go back of 12% per annum, identify the optimum plane replacement pattern time, in perpetuity.
6. 8 Kandy Corporation can be considering a better investment. The appliance currently utilized was formerly purchased couple of years ago pertaining to $65, 500. Tax-allowable devaluation is $13, 000 annually for five years. The current market value of this machine is definitely $23, 000. The new equipment being deemed would cost $140, 1000, and need $4, 000 shipping expense and $2, 000 installation costs. The economic life of the equipment is believed as 3 years. Tax-allowable downgrading is $70, 000 each year for the first 2 yrs. If the fresh machine is usually acquired, the investments in accounts receivable is expected to boost by $9, 000, the inventory by $13, 000, and accounts payable simply by $15, 000. The before-tax net functioning cash flow can be estimated as $120, 000 per year for three years with the old machine and, $143, 000 annually for the next 3 years with the fresh machine. The expected reselling value from the old and new machines in three years' period would be $4, 000 and $6, 600, respectively. The corporate tax rate is thirty percent.
(a) Calculate the initial investment linked to the proposed alternative decision. (b) Calculate the incremental operating cash runs of the suggested replacement decision. (c) Estimate the terminal cash flows associated with the recommended replacement decision. (d) Calculate the NPV of the alternative project assuming a...
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