Thursday, 22 November 2012

Last month, Lloyd's Systems analyzed the project whose cash flows are shown below. However, before the decision to accept or reject the project, the Federal Reserve took actions that changed interest rates and therefore the firm's WACC. The Fed's action did not affect the forecasted cash flows. By how much did the change in the WACC affect the project's forecasted NPV, and what would be your accept or reject decision?

Show all work, watch your formulas, and don’t forget to add value through appearance!                                         

1.      (10pts) Last month, Lloyd's Systems analyzed the project whose cash flows are shown below.  However, before the decision to accept or reject the project, the Federal Reserve took actions that changed interest rates and therefore the firm's WACC.  The Fed's action did not affect the forecasted cash flows.  By how much did the change in the WACC affect the project's forecasted NPV, and what would be your accept or reject decision? 

 

Old WACC:  10.00%                        New WACC:  11.25%

Year                                    0                    1                    2                    3     

Cash flows                   -$1,000           $410              $410              $410

 

 

2.      (10pts) Hindelang Inc. is considering a project that has the following cash flow and WACC data.  What is the project's MIRR, and would you accept or reject?

 

WACC:  11.25%

Year                                    0                    1                    2                    3                    4     

Cash flows                     -$850             $300             -$320             $540              $360

 

 

3.      (10pts) A firm is considering Projects S and L, whose cash flows are shown below.  These projects are mutually exclusive, equally risky, and not repeatable.  The CEO wants to use the IRR criterion, while the CFO favors the NPV method.  You were hired to advise the firm on the best procedure.  If the wrong decision criterion is used, how much potential value would the firm lose?  Show NPV and IRR.

 

WACC:  6.00%

Year                                    0                    1                    2                    3                    4     

CFS                                -$1,025           $380              $380              $380              $380

CFL                                -$2,150           $765              $765              $765              $765

 

4.      (20pts) I want you to build a data table for the following situation:  You have 5 years of projected data, starting with fiscal 2012 Revenue of 778,715, followed by 2013 at 888,716, 2014 at 911,420, 2015 at 897,878, and finally 2016 at 841,940.  Expenses can be found as 65% of revenue.  Given that info, calculate cash flows and ultimately NPV using 8% as your discount rate.  This is your base scenario for the data table.  I want you to build the table assuming discount rates are 6, 6.5, 7, 7.5, 8, 8.5, 9, 9.5, and 10% where the expenses assumptions begin at 50%, then 55, 60, 65, 70, 75, and 80%.   Your expense assumption should be the top row of the data table, and the discount rates down the column. 



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