First

Assignment:

Prepare

appropriate

NPV

analysis for the NPV Problems attached

BELOW: Note: in addition to the calculations, be prepared to interpret or explain how calculations impact decisions.

alculate

NPV + Payback Year8

8

# | Analysis – | C | Points | ||

NPV #1 | NPV + Payback Year | 8 | |||

NPV #2 | |||||

NPV #3 | NPV – for Lease Option v. Purchase Option |

Second assignment: The following relates to information on

Bonds:

BondABC$100,000$100,000$100,000

12%12%

5 years5 years

Semi-AnnualSemi-Annual

12%

Z | |||||

Face Value | $100,000 | ||||

State Rate | 12% | 0% | |||

Term | 5 years | 3 years | |||

Payable | Semi-Annual | N/A | |||

Market Rate | 10% | 14% | 20% |

Requirements:

a. Determine the value/issuance price of Bonds A, B, C, Z (4 poimts each = 16 points)

b. Calculate the following Year 2 values for Bonds A and C (4 points each = 8 points each

- Interest Expense Yr 2
- Cash Flow Yr. 2
- Carrying Value of Bond at 12/31/X2

You can submit your response using:

- Excel

Important INFORMATION: some work is done on the documents. I want you to edit on those documents (whatever is incorrect) and finish the problem. and explain how you got the answer for each. Both of these are done on excel.

CAPITAL BUDGETING – NPV #1

Jam is considering a 5 year project with involves the following:

▪ Initial investment in equipment of $540,000. Inventory and other working capital requirements of $20,000 are projected.

▪ Projected annual cash receipts on this project of $200,000

Copyright 2020 – Ruben Davila. No unauthorized distribution without express written consent.

▪

▪

Projected annual cash expenses of $40,000

Major repairs [non-capital] of $20,000 would be required in year 3

Copyright 2020 – Ruben Davila. No unauthorized distribution without express written consent.

▪

▪

The equipment is estimated to have a resale value of $25,000 at the conclusion of the project.

Jam’s cost of capital is 14%.

Required:

1. Calculate the NPV on this project.

2. Calculate the payback period on this project.

Copyright 2020 – Ruben Davila. No unauthorized distribution without express written consent.

CAPITAL BUDGETING – NPV #2

The Big Bad Texan Drilling Corp. owns drilling rights on a tract of land on which crude oil has been discovered. The BBTD

projects that the tract will allow drilling and recovery of crude for the next 4 years. They anticipate the following costs associated

with the project including the cost of restoring the land to a park-like atmosphere. Below are projected data associated with this

project:

Copyright 2020 – Ruben Davila. No unauthorized distribution without express written consent.

▪

▪

▪

▪

▪

▪

Annual cash receipts of $500,000.

Annual cash expenses of $300,000

Equipment requirements of $500,000. Some of this equipment will be sold for $20,000 at the conclusion of the lease.

The

remainder of the equipment will have no salvage value at the end of the project and will be abandoned, adding to the rustic parklike atmosphere of the property.

Inventory and supplies necessary to begin and maintain the project are $40,000.

The cost of restoring the land to a pristine park-like setting and convert the drilling equipment into monkey bars is projected to be

$100,000. [Assume this is not a capital expenditure.]

BBDC has a cost of capital of 15%.

Copyright 2020 – Ruben Davila. No unauthorized distribution without express written consent.

Required:

Evaluate this project for BBTD.

CAPITAL BUDGETING – NPV #3

Ruby Corp. is replacing some old equipment and are trying to decide whether or not to buy or lease the new equipment. The

equipment would be used over 5 years. Relevant information is as follows:

Lease Option: Ruby would enter a 5-year lease agreement with annual lease payments of $200,000 per year. The lease would

require a refundable deposit of $50,000. A significant advantage associated with the lease is that all operating, repair and

maintenance costs are covered by the lessor.

Purchase Option: Ruby would purchase the equipment by making an initial investment of $850,000. The equipment would be used

for 5 years at which it could be sold for an estimated $425,000. Annual operating costs associated with the equipment would be

$9,000. Estimated maintenance and repair costs would escalate over the 5 years. It is estimated that such costs would be $3,000 per

year for the first three years before increasing to $5,000 in year 4 and $10,000 in year 5.

Ruby has a cost of capital of 18%.

Required:

Evaluate wither or not Ruby should buy or lease the equipment.

NOW

0

Initial Investment

WC Requirements

Proj Annual Cash Receipts

Proj Annual Cash Expenses

Major Repairs

Equip Resale Value

Total $ Flows

14.0% PV Factor

Annual PV $

NPV

Payback

Explanation Here:

1

2

200,000

(40,000)

200,000

(40,000)

(540,000)

(20,000)

(560,000) 160,000 160,000

1

0.8772

(560,000) 140,352

(419,648)

(815)

(560,000) (400,000) (240,000)

3

200,000

(40,000)

(20,000)

4

5

200,000

(40,000)

20,000

200,000

(40,000)

25,000

140,000

160,000

205,000

–

–

–

(100,000)

60,000

NOW

0

1

500,000

(300,000)

2

3

500,000 500,000

(300,000) (300,000)

–

200,000

200,000

200,000

–

–

–

–

Annual Cash Reciepts

Annual Cash Expenses

Total $ Flows

PV Factor

Annual PV $

NPV

4

500,000

(300,000)

5

200,000

–

–

–

NOW

0

Total $ Flows

PV Factor

Annual PV $

NPV

1

2

3

–

–

–

–

–

–

–

–

4

5

–

–

–

–

Face value x stated rate/ 2 (semi-annual)

# of years x 2 (semi-annual)

Stated rate/ 2 (semi-annual)

PMT

N

Interest rate

Payment x 7.360

Present Value of Anuity

Period

Start of Year 2

1st Half of Year 2

2nd Half of Year 2

End of Year 2

Interest Rate

Total Interest Expesne Yr 2

Total Interest Expesne Yr 2

6,000

10 years

6% 7.360

44,160

Interest Expense PMT

5%

5000 6,000

5%

5000 6,000

5%

5000 6,000

5%

5000 6,000

Face Value

N

Interest rate

Face value x 0.5584

PRICE OF BOND

Carrying Value

100,000

100,000

100,000

100,000

100,000

Present Value of Single Amount

100,000

10 years

6%

55,840

0.5584

PMT

N

I

Present Value of Annuity

6,000

10 years

6%

7.360

44,160

PRICE OF BOND

Face Value

N

I

100,000

10 years

6%

Present Value of Single Amount

100,000

55,840

0.5584

PMT

N

I

Present Value of Annuity

BO

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