Question

9-2. Zebra Fashions is evaluating a capital budgeting project that should generate $94,800 per year for...

9-2. Zebra Fashions is evaluating a capital budgeting project that should generate $94,800 per year for four years. The initial cost is $245,000. a. If its required rate of return is 15%, should Zebra invest in the project? b. If Leopard evaluates the same project with its required rate of return of 11%, should Leopard invest in the project?

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

a.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=94800[1-(1.15)^-4]/0.15

=94800*2.854978363

=$270,651.95

NPV=Present value of inflows-Present value of outflows

=$270,651.95-$245000

=$25,651.95(Approx).

Hence since NPV is positive;investment must be made.

b.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=94800[1-(1.11)^-4]/0.11

=94800*3.10244569

=$294,111.85

NPV=Present value of inflows-Present value of outflows

=$294,111.85-$245000

=$49,111.85(Approx).

Hence since NPV is positive;investment must be made.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
You are evaluating a capital budgeting project that costs $25,000 and is expected to generate cash...
You are evaluating a capital budgeting project that costs $25,000 and is expected to generate cash flows equal to $10,000 per year for four years. The required rate of return is 10 percent. Compute the project’s (a) net present value, (b) profitability index, and (c) internal rate of return. (d) Should the project be purchased?
Jackson's Autos (JA) is evaluating a capital budgeting project that costs $565,000. The project will generate...
Jackson's Autos (JA) is evaluating a capital budgeting project that costs $565,000. The project will generate $100,000 per year for the next 10 years. JA's required rate of return is 11 percent. What is the project's internal rate of return (IRR)? a. 5.9% b. 17.7% c. 11.0% d. none of the above
Three Waters Co. is evaluating a proposed capital budgeting project that will require an initial investment...
Three Waters Co. is evaluating a proposed capital budgeting project that will require an initial investment of $1,350,000. The project is expected to generate the following net cash flows: Year Net Cash Flow 1 $300,000 2 $425,000 3 $400,000 4 $425,000 Three Waters Co. has been basing capital budgeting decisions on a project’s NPV; however, its new CFO wants to start using the internal rate of return (IRR) method for capital budgeting decisions. The CFO says that the IRR is...
Blue Llama Mining Company is evaluating a proposed capital budgeting project (project Delta) that will require...
Blue Llama Mining Company is evaluating a proposed capital budgeting project (project Delta) that will require an initial investment of $1,600,000. Blue Llama Mining Company has been basing capital budgeting decisions on a project’s NPV; however, its new CFO wants to start using the IRR method for capital budgeting decisions. The CFO says that the IRR is a better method because percentages and returns are easier to understand and to compare to required returns. Blue Llama Mining Company’s WACC is...
A hotel company is evaluating a capital project that management forecasts will generate $35,000 each year...
A hotel company is evaluating a capital project that management forecasts will generate $35,000 each year over its six year life. If the required rate of return given the project risks is 10 percent, and the project up front costs are estimated at $150,000, should management go forward with the project? (HINT: calculate the PV of the 6 year cash flows and compare to project's cost.) A or B? A. Management should approve project as NPV is positive. B. Management...
Suppose Cute Camel Woodcraft Company is evaluating a proposed capital budgeting project (project Alpha) that will...
Suppose Cute Camel Woodcraft Company is evaluating a proposed capital budgeting project (project Alpha) that will require an initial investment of $450,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $375,000 Year 2 $475,000 Year 3 $400,000 Year 4 $500,000 Cute Camel Woodcraft Company’s weighted average cost of capital is 10%, and project Alpha has the same risk as the firm’s average project. Based on the cash flows, what is project Alpha’s...
Suppose Happy Dog Soap Company is evaluating a proposed capital budgeting project (project Alpha) that will...
Suppose Happy Dog Soap Company is evaluating a proposed capital budgeting project (project Alpha) that will require an initial investment of $600,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $275,000 Year 2 $450,000 Year 3 $450,000 Year 4 $475,000 1. Happy Dog Soap Company’s weighted average cost of capital is 8%, and project Alpha has the same risk as the firm’s average project. Based on the cash flows, what is project...
Blue Llama Mining Company is evaluating a proposed capital budgeting project (project Delta) that will require...
Blue Llama Mining Company is evaluating a proposed capital budgeting project (project Delta) that will require an initial investment of $1,500,000. Blue Llama Mining Company has been basing capital budgeting decisions on a project’s NPV; however, its new CFO wants to start using the IRR method for capital budgeting decisions. The CFO says that the IRR is a better method because percentages and returns are easier to understand and to compare to required returns. Blue Llama Mining Company’s WACC is...
Consider the case of McCall Manufacturing: McCall Manufacturing is evaluating a proposed capital budgeting project that...
Consider the case of McCall Manufacturing: McCall Manufacturing is evaluating a proposed capital budgeting project that will require an initial investment of $144,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $41,200 Year 2 $51,100 Year 3 $46,800 Year 4 $44,900 Assume the desired rate of return on a project of this type is 9%. What is the net present value of this project? (Note: Do not round your intermediate calculations.) $4,754.49...
Kristin is evaluating a capital budgeting project that should last for 4 years. The project requires...
Kristin is evaluating a capital budgeting project that should last for 4 years. The project requires $675,000 of equipment. She is unsure what depreciation method to use in her analysis, straight-line or the 3-year MACRS accelerated method. Under straight-line depreciation, the cost of the equipment would be depreciated evenly over its 4-year life (ignore the half-year convention for the straight-line method). The applicable MACRS depreciation rates are 33%, 45%, 15%, and 7%. The company's WACC is 11%, and its tax...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT