The Basics of Capital Budgeting Evaluating Cash Flows


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See Attached File Document Preview: The Basics of Capital Budgeting Evaluating Cash Flows 10-19 (Multiple Rates of Return) The Ulmer Uranium Company is deciding whether or not to open a strip mine whose net cost is $4.4 million. Net cash inflows are expected to be $27.7 million, all coming at the end of Year 1. The land must be returned to its natural state at a cost of $25 million, payable at the end of Year 2. Plot the project’s NPV profile. Should the project be accepted if r= 8%? If r=14%? Explain you reasoning. Can you think of some other capital budgeting situations in which negative cash flows during or at the end of the project’s life might lead to multiple IRRs? What is the project’s MIRR at r= 8%? At r= 14%? Does the MIRR method lead to the same accept-reject decision at the NPV method? 10-20 (Present Value of Costs) The Aubey Coffee Company is evaluating the within-plant distribution system for its new roating, grinding, and packing plant. The two alternatives are (1) a conveyor system with a high initial cost but low annual operating costs, and (2) several forklift trucks, which cost less but have considerably higher operating costs. The decision to construct the plant has already been made, and the choice here will have no effect on the overall revenues of the project. The cost of capital for the plant is 8%, and the project’s expected net costs are listed in the following table: EXPECTED NET COST Year Conveyor (Alternative 1) Forklift (Alternative 2) 0 -$500,000 -$200,000 1 -$120,000 -$160,000 2 -$120,000 -$160,000 3 -$120,000 -$160,000 4 -$120,000 -$160,000 5 -$20,00 -$160,000 What is the IRR of each alternative? What is the present value of the costs of each alternative? Which method should be chosen? 10-21 (Payback, NPV, and MIRR) Your division is considering two investment projects, each of which requires an upfront expenditure of $25 million. You estimate that the cost of capital is 10% and that the investments will produce the following... Attachments: The-Basics-of....docx


Solution ID:565819 | This paper was updated on 26-Nov-2015

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