Fin419 Wk2

Project C: This project will be a scale-up of a project done last year. All the same processes will be used. The costs for the material and other resources should be scalable based on last year’s costs.

General Foods is a large corporation organized by product lines. They are evaluating Super Project, the manufacture of a new powdered dessert. Crosby Sanberg, a financial analysis manager, must determine the value in accepting the proposal, along with J.C. Kresslin, the Corporate Controller. The Super Project will increase profit with a payback period of less than ten years. The proposed capital investment for the project is $200,000 ($80,000 for building modifications and $120,000 for machinery and equipment) and production would take place

See Table 1: Expected non-operating cash flow when the project is terminated at year 4 = 165,880$

10. (Q. 14 in B) The profitability index for a project costing $40,000 and returning

Sharon Smith, the financial manager for Barnett Corporation, wishes to evaluate three prospective investments: X, Y, and Z. Sharon will evaluate each of these investments to decide whether they are superior to investments that her company already has in place, which have an expected return of 12% and a standard deviation of 6%. The expected returns and standard deviations of the investments are as follows:

Project B cover money earlier than project A, that is why project B should be accepted. Because money received now is important than money receive in future.

Project Free Cash Flows (dollars in thousands) Project number: 1 2 3 4 5 6 7 8 Initial investment (2,000) (2,000) (2,000) (2,000) (2,000) (2,000) (2,000) (2,000) Year 1 $ 330 $ 1,666 $ 160 $ 280 $ 2,200 $ 1,200 $ (350) 2 330 334 200 280 900 (60) 3 330 165 350 280 300 60 4 330 395 280 90 350 5 330 432 280 70 700 6 330 440 280 1,200 7 330 442 280

a) Enter relevant figures into the cash flows worksheet and justify any adjustments to the profit and

Proposal A requires an investment of $28000 and should have a positive net cash flow of $4480 annually for the first seven years.

In part c, we concluded that it would be difficult to make a choice between X and Y because the additional may or may not provide the needed compensation for the extra risk. In part d, by calculating a required rat was easy to reject both X and Y. The required return on both assets are above their expected returns.

(15 points) Your boss has requested that you analyze two projects for him and pick the one you would recommend for investment. Both projects have the same risk because they are in the same business, and their cash flows are: Project A (Year 0: -$100,000; Year 1: $30,000; Year 2: $40,000; Year 3: $50,000; Year 4: $100,410); Project B (Year 0: -$100,000; Year 1: 0; Year 2: $10,000; Year 3: $10,000; Year 4: $224,990). Which project will you recommend if the discount rate is 35%?

(15 points) Suppose your client is risk-averse but can invest in only one of the three securities, X, Y, or Z, in an uncertain world characterized as follows. Next year the economy will be in an expansion, normal, or recession state with probabilities 0.40, 0.40, and 0.20, respectively. The returns (%) on the three securities in these states are as follows: Security X {expansion = +14, normal = +10, recession = +7}; Security Y {+11, +9, +8}; Security Z {+13, +8, +7.5}. Which security can you rule out, that is, you will not advise your client to invest in it?

Project S’ cash inflows sum up to a total of $140, 000. It is more than enough to recover the cost outlay [cash outflow or cost of the investment], maintain and deliver the 10% opportunity cost of capital, and still have [present value of] $19.985 [in thousands of dollars] available which belongs to the shareholders [shareholder’s wealth increased by $19.985 (in thousands of dollars)].

Two new software projects are proposed to a young, start-up company. The Alpha project will cost $150,000 to develop and is expected to have annual net cash flow of $40,000. The Beta project will cost $200,000 to develop and is expected to have annual net cash flow of $50,000. The company is very concerned about their cash flow.

A second project requires an investment of $200,000 and it generates cash as follows: $20,000 in Year 1; $60,000 in Year 2; $80,000 in Year 3; $100,000 in Year 4; $70,000 in Year 5. The payback period is 3.4 years ($20,000 + $60,000 + $80,000 = $160,000 in the first three years + $40,000 of the $100,000 occurring in Year 4).