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Problems - Assignment Example

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After the fourth year, the project will have no residual value. Using the most likely estimates of the cash flows, conduct a discounted cash flow calculation assuming a…
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Problems Question 6 A four year financial project has estimates of net cash flows shown in the following table:
Year
Pessimistic ($)
Most Likely ($)
Optimistic ($)
1
14000
20000
22000
2
19000
25000
30000
3
27000
30000
36000
4
32000
35000
39000
It will cost $ 65,000 to implement the project, all of which must be invested at the beginning of the project. After the fourth year, the project will have no residual value. Using the most likely estimates of the cash flows, conduct a discounted cash flow calculation assuming a 20 percent hurdle rate with no inflation. ( You may use either excel or a paper and pencil calculation). What is the discounted profitability of the project?
The discounted cash
DCF=CF1/(1+r)1 + CF2/(1+r)2+…….CFn/(1+r)n
FV=DCF.(1+i)n
where
DPV is the discounted present value of the future cash flow (FV), or FV adjusted for the delay in receipt;
FV is the nominal value of a cash flow amount in a future period;
i is the interest rate, which reflects the cost of tying up capital and may also allow for the risk that the payment may not be received in full;
d is the discount rate, which is i/(1+i), i.e., the interest rate expressed as a deduction at the beginning of the year instead of an addition at the end of the year;
n is the time in years before the future cash flow occurs.
Where multiple cash flows in multiple time periods are discounted, it is necessary to sum them as follows:
All the above assumes that the interest rate remains constant throughout the whole period.
DCF = {6500000/(1+4)4 }
= 6500000/625
= 10,400
Question 7
Given the table in the problem 6, assume that the cash flow estimates for each year are best represented by triangular distribution and that the hurdle rate is 20 percent.
a. Use crystal ball to find the expected NPV of the project
= NPV = 12450
b. What is the profitability that the project will yield a return greater than the 20 percent hurdle rate?
Profitability = 370000
Questions 8
If an inflation rate of 2 percent , normally distributed with a standard deviation of 0.33 percent, is assumed, what is the expected NPV of the project in problem 7, and what is the probability that it will qualify?
ENPV = (102/100)*12450
= 15048
Questions 9
Use a weighted score model to choose between three methods (A,B,C) of financing the acquisition of major competitor. The relative weights for each criterion are shown in the following table as are the scores for each location on each criterion. A score of 1 represents unfavorable, 2 Satisfactory, and 3 favorable
Method
Category
Weight
A
B
C
Consulting costs
20
1
2
3
Acquisition time
20
2
3
1
Disruption
10
2
1
3
Cultural differences
10
3
3
2
Skill redundancies
10
2
1
2
Implementation risks
25
1
2
3
Infrastructure
10
2
2
2
Questions 10
Develop a spread sheet for problem 9
a. What would your recommendation be if the weight for the implementation risks went down to 10 and the weight of cultural differences went up to 25?
b. Suppose instead that method A received a score of 3 for implementation risks. Would your recommendation change under these circumstances?
Yes, when there are changes in implementation risks, Acquisition time changes hence increasing the Consulting costs overall on both models.
c. The vice president of finance has looked at your original scoring model and feels that the tax considerations should be included in the model with a weight of 15. In addition, The VP has scored the methods on tax considerations as follows: Method A received a score of 3, method B received a score of 2 and method C received a score of 1. How would this additional information affect your recommendation?
The above information will affect my recommendation since the model A will have extra changes in computational weight hence creating changes at large. Read More
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