Expert answer:capital budgeting data

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Solved by verified expert:submit a draft of the Capital Budgeting Data section of the final project, along with your supporting explanations. Base your calculations on the data provided in this case study https://www.sec.gov/Archives/edgar/data/354950/000…. Be sure to substantiate your claims.
fin550_capital_budgeting_handout_term_17tw1.doc

fin550_capital_budgeting_handout_term_17tw1.doc

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SOUTHERN NEW HAMPSHIRE UNIVERSITY
Term 17TW1
FIN550: Chapter 10 Handout (Capital Budgeting)
INSTRUCTOR: Dr. Gary P. Tripp
Your boss has just handed you the following estimated cash flows for two proposed projects.
Project X involves adding a new product to the firm’s existing product lines. Since it would take
some time to build up a market for the new product, the expected cash flows will gradually rise
over time. Product Y involves a modification to an existing product, and thus its cash flows are
expected to decrease over time. Both projects have 3-year lives.
Here are the net cash flow estimates (in millions of dollars):
Expected Net Cash Flows
Year
0
1
2
3
Project X
($250)
25
150
200
Project Y
($250)
175
125
50
Your boss informs you that depreciation, salvage values, net working capital requirements and
tax effects are included in all of the above estimated cash flows. Subjective risk assessments
have been made for both projects, and the risk characteristics are similar to the firm’s typical
project. Finally, the overall cost of capital (i.e., WACC) is 10 percent.
Accept or Reject
Method
Payback
Period
Discounted
Payback
Period
Net
Present
Value
IRR
Profit.
Index
Modified
IRR
Project
X
Project
Y
Independ.
X
Mutually
Excl. X
Accept or Reject
Independ.
Y
Mutually
Excl. Y
2
TABLE OF NPVs (IN DOLLARS) FOR PROJECTS X & Y
Cost of Capital (WACC)
Net Present Value: X
Net Present Value: Y
0%
5%
10%
15%
20%
NET PRESENT VALUE PROFILES: NPVX AND NPVY
Note: The cross-over rate occurs at 8.68% for Projects X & Y.
SOUTHERN NEW HAMPSHIRE UNIVERSITY
Term 17TW1
FIN550: Chapter 10 Handout (Capital Budgeting)
INSTRUCTOR: Dr. Gary P. Tripp
Your boss has just handed you the following estimated cash flows for two proposed projects.
Project X involves adding a new product to the firm’s existing product lines. Since it would take
some time to build up a market for the new product, the expected cash flows will gradually rise
over time. Product Y involves a modification to an existing product, and thus its cash flows are
expected to decrease over time. Both projects have 3-year lives.
Here are the net cash flow estimates (in millions of dollars):
Expected Net Cash Flows
Year
0
1
2
3
Project X
($250)
25
150
200
Project Y
($250)
175
125
50
Your boss informs you that depreciation, salvage values, net working capital requirements and
tax effects are included in all of the above estimated cash flows. Subjective risk assessments
have been made for both projects, and the risk characteristics are similar to the firm’s typical
project. Finally, the overall cost of capital (i.e., WACC) is 10 percent.
Accept or Reject
Method
Payback
Period
Discounted
Payback
Period
Net
Present
Value
IRR
Profit.
Index
Modified
IRR
Project
X
Project
Y
Independ.
X
Mutually
Excl. X
Accept or Reject
Independ.
Y
Mutually
Excl. Y
2
TABLE OF NPVs (IN DOLLARS) FOR PROJECTS X & Y
Cost of Capital (WACC)
Net Present Value: X
Net Present Value: Y
0%
5%
10%
15%
20%
NET PRESENT VALUE PROFILES: NPVX AND NPVY
Note: The cross-over rate occurs at 8.68% for Projects X & Y.
…
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