University of Connecticut School of Business -Department of Finance Financial Management (FNCE3101) Homework 4 – Spring 2022 Prof. John D. Knopf Due: April 4th 11:59pm Complete on an EXCEL spreadsheet...

University of Connecticut
School of Business -Department of Finance
Financial Management (FNCE3101)
Homework 4 – Spring 2022
Prof. John D. Knopf
Due: April 4th 11:59pm

Complete on an EXCEL spreadsheet and submit to HUSKYCT.

1. A company is considering the following project. It’s required rate of return is 10%. Its
Payback cutoff is 4 years.

Year Cash Flow
0 -250,000
1 +50,000
2 +100,000
3 +30,000
4 +50,000
5 +90,000
6 +60,000

a. What is the Payback Period? Should the company accept the project using the Payback
method?
. What is the NPV? Should the company accept the project using the NPV method?
c. What is the IRR? Should the company accept the project using the IRR method?

2. CTC Co. bought a new machine for \$200,000. CTC will depreciate the machine using the
ACRS method. The machine is classified as a 7-year asset. How much will CTC depreciate
each year for the depreciable life of the asset?

3. The Loviscek Co. is considering the purchase of a new machine. Financial projections for
the investment are provided below.

Year XXXXXXXXXX
Cost of New Machine 500,000
Fixed Costs XXXXXXXXXX, XXXXXXXXXX,000
Depreciation XXXXXXXXXX, XXXXXXXXXX,000
Net Working Capital 50, XXXXXXXXXX, XXXXXXXXXX,000

The price per unit and variable cost per unit are \$40 and \$25, respectively. The company expects
to sell 30,000 units per year in years 1 & 2. After Year 2 cash flows will grow at a constant rate of
3% forever. The company discounts all cash flows at 10% and has a marginal tax rate of 20%.
What is the Net Present Value of the project?

Solution

Sandeep answered on Apr 05 2022
Sheet1
Ans 1
Pay Back period
Cash Outflows (T = 0)    (\$250,000)
Year     Cash Inflows :
1        \$50,000
2        \$100,000
3        \$30,000
4        \$50,000
5        \$90,000
6        \$60,000
PayBack Recovery Amount     \$230,000
Payback recovery period    4
Pending recovery from Project     (\$20,000)
In the 5th Year the Cash inflow is \$ 90000 and pending amount to recover from project is \$ 20,000
Payback Fraction    0.2222222222
Payback period     4.2222222222
Project Payoff cutoff Management     4
If Project Payoff cut off < Payback fraction computed     Reject Proposal
4< 4.222
If Project Payoff cut off > Payback fraction computed     Accept Proposal
Ans 1
Cash Outflows (T = 0)    (\$250,000)    Discount Rate    PV Factor    PV (CFAT)
Year     Cash Inflows :
1        \$50,000    10%    \$45,455    \$45,455
2        \$100,000    10%    \$82,645    \$82,645
3        \$30,000    10%    \$22,539    \$22,539
4        \$50,000    10%    \$34,151    \$34,151
5        \$90,000    10%    \$81,818    \$81,818
6        \$60,000    10%    \$54,545    \$54,545
\$321,153
Total Discounted Cash Flow     \$321,153
Total Investment in Project     (\$250,000)
NPV    \$71,153
Hence the NPV is positive and \$ 71,153 the Project should be accepted
Ans 1 c
Cash...
SOLUTION.PDF