Question

The CFO of a major corporation is trying to decide on what project to pursue using different investment criteria: Net Present Value (NPV), Payback Period, Discounted Payback Period, Internal Rate of Return (IRR), and the Profitability Index (PI). The CFO has four projects to choose between: Project W (which is a strip mine - see problem 6), Project X, Project Y, and Project Z. Additional information about each project is summarized below You can use the workspace provided to help answer questions 6-11 Project w Conta S900M today(T-01 appropriate diacouet rde il 60% oject w generales six uf1er tax sash flows beginng one year from now (T-11, the 'alue of each cash floy in me hable belo YEAR X Costs $800M today (T-01 appropriat. discount rene 116.096 Projact X Y Cost: $1000M today (T=01 appropriato discount rate il 80% oject Y gereratas įtrito after tax cash Flowsi tha first cash Flow n S60M onc year from now (T-1h cash flow, thereafter wil grow at 4.0% Project Y Z Cost, $ 1200M today (T-01 approprkre discon, rate 7.0% Proiect Z CFO CF 6. Project W is a strip mine which requires you to clean up environmental damage when retiring the mine; this is why cash flows in year 5 and year 6 are negative. The NPV of Project W is closest to: a. $442 b. $600 c. $640 d. $1440 e. $1500 7. The CFO decides to pursue only one project, but the project is required to have an NPV greater than or equal to $500M. If more than one project satisfies this criteria, the CFO will make the decision to pick the project with the highest Pl. Which project would you choose: C. e. None of the projects 8. For this problem only, assume the CFO only has $2000 to invest today, the CFO cannot borrow any additional funds, and any remaining funds (not invested in the projects) earns 0.0% interest. The CFO wants to maximize NPV by pursuing as many projects possible. Which project (s) would the CFO choose: a. W, X, Y, Z e. Y & Z

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

Home nert Page Layout Formulas Data Review View dd-Ins Cut ta copy ▼ E AutoSum ー E " ゴWrap Text в 1 프 . Ej-., Δ. : rーー 逻锂函Merge & Center. $, % , 弼,8 Conditional Format eCell Insert Delete Format Sort &Find & Format Painter Formatting as Table Styles2 Clear Clipboard Alignment Number Cells Edting DH DI DJ DK DM DN DO DP DR DS DT DU DV PROJECT W PV FACTOR AT 6% PV OF 45 46 47 48 49 50 PROJECT X NPV = PV OF ALL ACSH INFLOWS-INVESTMENT NPV (240 X PVI FA@6%, 6 YEARS)-800 NPV(240 X4.9173) - 800 NPV- YEAR CF CF 0 1 -900.00 0.9434 283.02 0.8900 445.00 0.8396671.70 0.7921 158.42 0.747374.73 0.7050 -140.99 442.41 380.15 500 800 200 100 200 PROJECTY PERPETUAL CASHFLOWS WITH GROWTH RATE 52 53 54 4 PV = PV OF ALL ACSH IN FLOWS- INVESTMENT NPV= CF/(r-g)-INVESTMENT NPV60/(0.08-0.04) 1000 NPV- 6 NPV = 500.00 56 57 58 59 60 61 62 14 PROJECTz NPV-PV OF ALL ACSH INFLOWS INVESTMENT NPV- (120 X PVI FA@7%, 30 YEARS)-1200 NPV= (120 X 12.4090)-1200 NPV- 289.08 IRRmpv PBP erences: E147 external rate MIRR NpV IRR REPLACEMENT S i HPR GMAM EAC MACRS LEASE CASH BUDGET i BOND EPS EBIT REPLACEMENT ( vacc bond sens tvt i 01:50 11-01-2019

Home nert Page Layout Formulas Data Review View dd-Ins Cut Σ AutoSum ー E " ゴWrap Text General ta copy." в 1 프 . Ej-., Δ. : rーー 逻锂函Merge & Center. $, % , 弼,8 C Paste Conditional Format CeInsert Delete Format Formatting as Table Styles2 Clear Sort &Find & Format Painter Clipboard Font Alignment Number Styles Cells Edting DH79 DH DI DJ DK DL DM DN DO DP DQ DR DS DT DU DV 63 65 6 PROJECT W NSWER a : $442 67 68 69 70 71 72 73 74 75 76 PI= 1 + (NPV/INVESTMENT) W 1.4916 X1.4752 Y 1.5000 Z 1.2409 ANSWER C:Y 8 INVESTMENT IN W & Y TODAY = 900 + 1000-1900 AND NPV = 442.41 + 500 = 942.41, WHICH IS HIGHEST ANSWER: b: PROJECT W & Y 78 79 80 81 14 IRRmpv PBP erences: E147 external rate MIRR NpV IRR REPLACEMENT S i HPR GMAM EAC MACRS LEASE CASH BUDGET i BOND EPS EBIT REPLACEMENT ( vacc bond sens tvt i 01:53 11-01-2019