Complete two problems evaluating potential capital expenditure projects.

Introduction

By successfully completing this assessment, you will demonstrate your proficiency in the course competencies through the following assessment scoring guide criteria:

Competency 5. Apply evaluation principles of various financial instruments.

Calculate capital budgeting criteria.

Apply evaluation principles to complete a project analysis.

Instructions

For this assessment, complete Problems 1–2 to evaluate potential capital expenditure projects. You may solve the problems algebraically, or you may use a financial calculator or an Excel spreadsheet. In addition to your solution to each computational problem, you must show the supporting work leading to your solution to receive credit for your answer. Note the following:

You may need an HP 10B II business calculator.

You may use Word or Excel, but you will find Excel to be most helpful for creating spreadsheets.

If you choose to solve the problems algebraically, be sure to show your computations.

If you use a financial calculator, show your input values.

If you use an Excel spreadsheet, show your input values and formulas.

Problem 1: Capital Budgeting Criteria

XYZ Inc. is considering two projects. Its WACC is 12 percent, and the projects’ after-tax cash flows (in millions of dollars) would be as follows:

01234Project A-$30$5$10$15$20Project B-$30$20$10$8$6

Calculate the projects’ NPVs, IRRs, MIRRs, regular paybacks, and discounted paybacks.

How might conflicts exist between the NPV and the IRR when independent projects are evaluated? Explain your answer.

Problem 2: New Project Analysis

XYZ Inc. needs to install a new manufacturing machine. The base price is $100,000. Installation costs are $10,000. After 3 years the machine will be sold for $75,000. Applicable depreciation rates are 33 percent, 45 percent, 15 percent, and 7 percent. The machine would require a $5,000 increase in net operating working capital (increased inventory less increased accounts payables). Revenue would not be affected. Pretax labor costs would decline by $40,000 per year. The marginal tax rate is 40 percent, and the WACC is 10 percent. Also, the firm spent $7,000 in feasibility tests.

$7,000 was spent last year. How should this be handled?

For capital budgeting purposes, what is the initial investment outlay for the machine? That is, what is the Year 0 project cash flow?

Competencies Measured

By successfully completing this assessment, you will demonstrate your proficiency in the course competencies through the following assessment scoring guide criteria:

Competency 5. Apply evaluation principles of various financial instruments.

Calculate capital budgeting criteria.

Apply evaluation principles to complete a project analysis.