Fundamentals of Capital Budgeting: Percolated Fiber Free Cash Flow

Fundamentals of Capital Budgeting: Percolated Fiber Free Cash Flow in $1.50 only (Instant Download)

You are a manager at Percolated Fiber, which is considering expanding its operations in synthetic fiber manufacturing. Your boss comes into your office, drops a consultant’s report on your desk, and complains, “We owe these consultants $1 million for this report, and I am not sure their analysis makes sense. Before we spend the $25 million on new equipment needed for this project, look it over and give me your opinion.” You open the report and find the following estimates (in millions of dollars):

All of the estimates in the report seem correct. You note that the consultants used straight-line depreciation for the new equipment that will be purchased today (year 0), which is what the accounting department recommended. The report concludes that because the project will increase earnings by $4.875 million per year for ten years, the project is worth $48.75 million. You think back to your halcyon days in finance class and realize there is more work to be done!

Chapter 11 Capital Budgeting Assigned Problem 1

Chapter 11 Capital Budgeting Assigned Problem 1 in $2 OnlyChapter 11 Capital Budgeting Assigned Problem 1

Winston clinic is evaluating a project that costs $52,125 and has expected net cash flows of $12,000 per year for eight years. The first inflow occurs one year after the cost outflow, and the project has a cost of capital of 12 percent.

a. Which is the project’s payback?

b. What is the project’s NPV? It’s IRR?

c. Is the project financially acceptable? Explain your answer.

Sample Answer: 

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Capital Budgeting/ Cost of Capital

Capital Budgeting/ Cost of Capital in $14

Shell Solar Water Inc. (SSI) is a market leader in the production and distribution of solar water heating systems throughout the OECS.The company is considering establishing a production plant on the island of Grand Cayman to decrease the cost of its operations. SSI had already purchased some land two years ago for $1,500,000 on which it plans to build its new plant which costs $4,000,000 to house its manufacturing business.The legal fee attached to this purchase was $120,000 and the company believes it can recover this cost through the sales of its systems which it expects to be more than what it currently enjoys.The company uses a CCA rate of 8 percent for the amortizing of its plant which can be scrapped for $780,000 at the end of the project life.