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Build a Model Solution 8/13/15Note: when creating student version, be sure to delete Scenario Summary worksheet. Also delete the Best and Worse case scenarios from the Scenario Manager. Also delete this message in the student version.Chapter:11Estimating Cash Flows and Analyzing RiskProblem:18Webmasters.com has developed a powerful new server that would be used for corporations’ Internet activities. It would cost $10 million at Year 0 to buy the equipment necessary to manufacture the server. The project would require net working capital at the beginning of each year in an amount equal to 10% of the year's projected sales; for example, NWC0 = 10%(Sales1). The servers would sell for $24,000 per unit, and Webmasters believes that variable costs would amount to $17,500 per unit. After Year 1, the sales price and variable costs will increase at the inflation rate of 3%. The company’s nonvariable costs would be $1 million at Year 1 and would increase with inflation. The server project would have a life of 4 years. If the project is undertaken, it must be continued for the entire 4 years. Also, the project's returns are expected to be highly correlated with returns on the firm's other assets. The firm believes it could sell 1,000 units per year. The equipment would be depreciated over a 5-year period, using MACRS rates. The estimated market value of the equipment at the end of the project’s 4-year life is $500,000. Webmasters’ federal-plus-state tax rate is 40%. Its cost of capital is 10% for average-risk projects, defined as projects with a coefficient of variation of NPV between 0.8 and 1.2. Low-risk projects are evaluated with a WACC of 8%, and high-risk projects at 13%.a. Develop a spreadsheet model, and use it to find the project’s NPV, IRR, and payback. Input Data (in thousands of dollars)Equipment cost$10,000Key Results:Net operating working capital/Sales10% NPV =$3,463First year sales (in units)1,000 IRR =21.1%Sales price per unit$24.00 Payback =2.90Variable cost per unit (excl. depr.)$17.50Nonvariable costs (excl. depr.)$1,000Market value of equipment at Year 4$500Tax rate40%WACC10%Inflation in prices and costs3.0%Estimated salvage value at year 4$500Intermediate Calculations01234Units sold1,0001,0001,0001,000Sales price per unit (excl. depr.)$24.00$24.72$25.46$26.23Variable costs per unit (excl. depr.)$17.50$18.03$18.57$19.12Nonvariable costs (excl. depr.)1,0001,0301,0611,093Sales revenue$24,000$24,720$25,462$26,225Required level of net operating working capital$2,400$2,472$2,546$2,623$0Basis for depreciation$10,000Annual equipment depr. rate20.00%32.00%19.20%11.52%Annual depreciation expense$2,000$3,200$1,920$1,152Ending Bk Val: Cost – Accum Dep'rn$10,000$8,000$4,800$2,880$1,728Salvage value$500Profit (or loss) on salvage-$1,228Tax on profit (or loss)-$491Net cash flow due to salvage$991YearsCash Flow Forecast01234Sales revenue$24,000$24,720$25,462$26,225Variable costs17,50018,02518,56619,123Nonvariable opera ...
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Monte Carl Simulation is a powerful and effective tool when used properly helps to navigate the expected Net Present Value NPV. This presentation helps to improve the pattern to ackowlege onthe Odessa Investment by Decision Dres.
1-Base-CaseTool KitChapter 11112118Note Calculations are automa
1-Base-CaseTool KitChapter 1111/21/18Note: Calculations are automatic, including for tables. This will make the calculations take longer to complete. You can disable automatic calculations for tables by following the steps shown here.Cash Flow Estimation and Risk AnalysisWorksheet 1-Base-CaseThis worksheet contains the base-case model. It calculates an expansion project's cash flows and performance measures using base-case, or most likely, values for the input variables. It also includes the basic analysis but with straight-line depreciation and bonus depreciation.Go to the menu "Files" at the top left of the menu bar.Select "Options" from the items in the first column.This will give you the screen shown below:The second worksheet (2-Sens) extends the basic model to include sensitivity analysis using Data Tables (we include a brief tutorial on the use of Data Tables). Worksheet 2-Sens also illustrates special cases of sensitivity analysis, including breakeven analysis, one-way data tables with multiple outputs, and two-way data tables.Worksheet 3a-Sens extends the basic model to include scenario analysis. Worksheet 3b-ScenMgr shows how to use Excel's Scenario Manager for scenario analysis.Worksheet 4-Sim extends the basic model to include simulation analysis. Worksheet 5-Replmt illustrates the analysis for a proposed cost-reducing replacement investment. Replacement decisions differ from expansion decisions because most of the cash flows are found by subtracting the old project's cash flows from those of the new project to calculate incremental cash flows for use in the analysis.Worksheet 6-DecTree extends the scenario analysis to examine two decision trees in which the decision is made in stages. The first one simply shows the situation where the firm can abandon the project if things are not working out and cash flows are negative. The second one involves a marketing study and a prototype of the final product designed to learn more about demand before deciding to go into full production.Worksheet Appendix 11-A provides depreciation tables as described in Appendix A of the textbook. It also shows examples using straight-line depreciation and bonus depreciation.11-1 Identifying Relevant Cash FlowsA proposal’s relevant project cash flows are the differences between the cash flows the firm will have if it implements the project versus the cash flows it will have if it rejects the project. These are called incremental cash flows.Choose "Formulas" in the first column.11-2 Analysis of an Expansion ProjectThis will give you the screen shown below.The figure below shows the inputs and key results of Project L (one of the projects whose cash flows are used in the previous chapter); the actual analysis is conducted further below in the worksheet. The values in the Inputs section are linked to the model, as are the values shown in Key Results. If you change any of the values in the Input Section, the model recalculate almost instantly, causing ch ...
1-Base-CaseTool KitChapter 11112118Note Calculations are automa
1-Base-CaseTool KitChapter 1111/21/18Note: Calculations are automatic, including for tables. This will make the calculations take longer to complete. You can disable automatic calculations for tables by following the steps shown here.Cash Flow Estimation and Risk AnalysisWorksheet 1-Base-CaseThis worksheet contains the base-case model. It calculates an expansion project's cash flows and performance measures using base-case, or most likely, values for the input variables. It also includes the basic analysis but with straight-line depreciation and bonus depreciation.Go to the menu "Files" at the top left of the menu bar.Select "Options" from the items in the first column.This will give you the screen shown below:The second worksheet (2-Sens) extends the basic model to include sensitivity analysis using Data Tables (we include a brief tutorial on the use of Data Tables). Worksheet 2-Sens also illustrates special cases of sensitivity analysis, including breakeven analysis, one-way data tables with multiple outputs, and two-way data tables.Worksheet 3a-Sens extends the basic model to include scenario analysis. Worksheet 3b-ScenMgr shows how to use Excel's Scenario Manager for scenario analysis.Worksheet 4-Sim extends the basic model to include simulation analysis. Worksheet 5-Replmt illustrates the analysis for a proposed cost-reducing replacement investment. Replacement decisions differ from expansion decisions because most of the cash flows are found by subtracting the old project's cash flows from those of the new project to calculate incremental cash flows for use in the analysis.Worksheet 6-DecTree extends the scenario analysis to examine two decision trees in which the decision is made in stages. The first one simply shows the situation where the firm can abandon the project if things are not working out and cash flows are negative. The second one involves a marketing study and a prototype of the final product designed to learn more about demand before deciding to go into full production.Worksheet Appendix 11-A provides depreciation tables as described in Appendix A of the textbook. It also shows examples using straight-line depreciation and bonus depreciation.11-1 Identifying Relevant Cash FlowsA proposal’s relevant project cash flows are the differences between the cash flows the firm will have if it implements the project versus the cash flows it will have if it rejects the project. These are called incremental cash flows.Choose "Formulas" in the first column.11-2 Analysis of an Expansion ProjectThis will give you the screen shown below.The figure below shows the inputs and key results of Project L (one of the projects whose cash flows are used in the previous chapter); the actual analysis is conducted further below in the worksheet. The values in the Inputs section are linked to the model, as are the values shown in Key Results. If you change any of the values in the Input Section, the model recalculate almost instantly, causing ch ...
Risk Analysis and Project Evaluation/Abshor.Marantika/Gita Mutiara Ovelia/3-3
Tugas Individu Manajemen Keuangan kelas 3-3 DIII Kebendaharaan Negara PKN STAN
Build a ModelBuild a Model112618Chapter10Problem23Gardial Fish.docx
Build a ModelBuild a Model11/26/18Chapter:10Problem:23Gardial Fisheries is considering two mutually exclusive investments. The projects' expected net cash flows are as follows:Expected Net Cash FlowsTimeProject AProject B0($375)($575)1($300)$1902($200)$1903($100)$1904$600$1905$600$1906$926$1907($200)$0a. If each project's cost of capital is 12%, which project should be selected? If the cost of capital is 18%, what project is the proper choice? @ 12% cost of capital @ 18% cost of capitalUse Excel's NPV function as explained in this chapter's Tool Kit. Note that the range does not include the costs, which are added separately.WACC =12%WACC =18%NPV A =NPV A =NPV B =NPV B =At a cost of capital of 12%, Project A should be selected. However, if the cost of capital rises to 18%, then the choice is reversed, and Project B should be accepted.b. Construct NPV profiles for Projects A and B.Before we can graph the NPV profiles for these projects, we must create a data table of project NPVs relative to differing costs of capital.Project AProject B0%2%4%6%8%10%12%14%16%18%20%22%24%26%28%30%c. What is each project's IRR?We find the internal rate of return with Excel's IRR function:IRR A =Note in the graph above that the X-axis intercepts are equal to the two projects' IRRs.IRR B =d. What is the crossover rate, and what is its significance?Cash flowTimedifferential012Crossover rate =34The crossover rate represents the cost of capital at which the two projects value, at a cost of capital of 13.14% is:
have the same net present value. In this scenario, that common net present567e. What is each project's MIRR at a cost of capital of 12%? At r = 18%? Hint: note that B is a 6-year project. @ 12% cost of capital @ 18% cost of capitalMIRR A =
DII Labs: Use Excel's MIRR function
DII Labs: The difference in cash flows between Project "A" and Project "B".
DII Labs: Net Present Value of "A" discounted at a WACC of 12%
DII Labs: The IRR for the Cash Flow Differential
DII Labs: Net Present Value of "A" discounted at a WACC of 18%
MIRR A =MIRR B =MIRR B =f. What is the regular payback period for these two projects?Project ATime period01234567Cash flow(375)(300)(200)(100)600$600$926($200)Cumulative cash flowIntermediate calculation for paybackPayback using intermediate calculationsProject BTime period01234567Cash flow-$575$190$190$190$190$190$190$0Cumulative cash flowIntermediate calculation for paybackPayback using intermediate calculationsPayback using PERCENTRANKOk because cash flows follow normal pattern.g. At a cost of capital of 12%, what is the discounted payback period for these two projects?WACC =12%Project ATime period01234567Cash flow-$375-$300-$200-$100$600$600$926-$200Disc. cash flowDisc. cum. cash flowIntermediate calculation for paybackPayback using intermediate calculationsProject BTime period0123456.
Compute IRR and NPV in Microsoft Excel 1.IRR Function .docx
Compute IRR and NPV in Microsoft Excel
1.IRR Function
Description:
The Microsoft Excel IRR function returns the internal rate of return for a series of cash flows. The cash
flows must occur at regular intervals, but do not have to be the same amounts for each interval.
Syntax
The syntax for the IRR function in Microsoft Excel is:
IRR(range, [estimated_irr] )
Parameters or Arguments
range
A range of cells that represent the series of cash flows.
estimated_irr
Optional. It is your guess at the internal rate of return. If this parameter is omitted, it
assumes an estimated_irr of 0.1 or 10%
Example (as Worksheet Function)
Let's look at some Excel IRR function examples and explore how to use the IRR function as a
worksheet function in Microsoft Excel:
Based on the Excel spreadsheet above:
This first example returns an internal rate of return of 28%. It assumes that you start a
business at a cost of $7,500. You net the following income for the first four years: $3,000,
$5,000, $1,200, and $4,000.
This next example returns an internal rate of return of 5%. It assumes that you start a
business at a cost of $10,000. You net the following income for the first three years: $3,400,
$6,500, and $1,000.
=IRR(B1:B4)
Result: 5%
2.NPV Function
Description
The Microsoft Excel NPV function returns the net present value of an investment.
Syntax
The syntax for the NPV function in Microsoft Excel is:
NPV( discount_rate, value1, [value2, ... value_n] )
Parameters or Arguments
discount_rate
The discount rate for the period.
value1, value2, ... value_n
The future payments and income for the investment (ie: cash flows). There can be up
to 29 values entered.
Note
Microsoft Excel's NPV function does not account for the intial cash outlay, or may account for
it improperly depending on the version of Excel. However, there is a workaround.
This workaround requires that you NOT include the initial investment in the future
payments/income for the investment (ie: value1, value2, ... value_n), but instead, you need to
subtract from the result of the NPV function, the amount of the initial investment.
The workaround formula is also different depending on whether the cash flows occur at the
end of the period (EOP) or at the beginning of the period (BOP).
If the cash flows occur at the end of the period (EOP), you would use the following formula:
=NPV( discount_rate, value1, value2, ... value_n ) - Initial Investment
If the cash flows occur at the beginning of the period (BOP), ou would use the following
formula:
=NPV( discount_rate, value2, ... value_n ) - Initial Investment + value1
Example (as Worksheet Function)
Let's look at some NPV examples and explore how to use the NPV function as a worksheet
function in Microsoft Excel:
This first example returns a net present value of $3,457.19. It assumes that you pay $7,500
as an initial investment . You then receive the following in ...
Recommended
Risk & capital budgeting
Monte Carl Simulation is a powerful and effective tool when used properly helps to navigate the expected Net Present Value NPV. This presentation helps to improve the pattern to ackowlege onthe Odessa Investment by Decision Dres.
1-Base-CaseTool KitChapter 11112118Note Calculations are automa
1-Base-CaseTool KitChapter 1111/21/18Note: Calculations are automatic, including for tables. This will make the calculations take longer to complete. You can disable automatic calculations for tables by following the steps shown here.Cash Flow Estimation and Risk AnalysisWorksheet 1-Base-CaseThis worksheet contains the base-case model. It calculates an expansion project's cash flows and performance measures using base-case, or most likely, values for the input variables. It also includes the basic analysis but with straight-line depreciation and bonus depreciation.Go to the menu "Files" at the top left of the menu bar.Select "Options" from the items in the first column.This will give you the screen shown below:The second worksheet (2-Sens) extends the basic model to include sensitivity analysis using Data Tables (we include a brief tutorial on the use of Data Tables). Worksheet 2-Sens also illustrates special cases of sensitivity analysis, including breakeven analysis, one-way data tables with multiple outputs, and two-way data tables.Worksheet 3a-Sens extends the basic model to include scenario analysis. Worksheet 3b-ScenMgr shows how to use Excel's Scenario Manager for scenario analysis.Worksheet 4-Sim extends the basic model to include simulation analysis. Worksheet 5-Replmt illustrates the analysis for a proposed cost-reducing replacement investment. Replacement decisions differ from expansion decisions because most of the cash flows are found by subtracting the old project's cash flows from those of the new project to calculate incremental cash flows for use in the analysis.Worksheet 6-DecTree extends the scenario analysis to examine two decision trees in which the decision is made in stages. The first one simply shows the situation where the firm can abandon the project if things are not working out and cash flows are negative. The second one involves a marketing study and a prototype of the final product designed to learn more about demand before deciding to go into full production.Worksheet Appendix 11-A provides depreciation tables as described in Appendix A of the textbook. It also shows examples using straight-line depreciation and bonus depreciation.11-1 Identifying Relevant Cash FlowsA proposal’s relevant project cash flows are the differences between the cash flows the firm will have if it implements the project versus the cash flows it will have if it rejects the project. These are called incremental cash flows.Choose "Formulas" in the first column.11-2 Analysis of an Expansion ProjectThis will give you the screen shown below.The figure below shows the inputs and key results of Project L (one of the projects whose cash flows are used in the previous chapter); the actual analysis is conducted further below in the worksheet. The values in the Inputs section are linked to the model, as are the values shown in Key Results. If you change any of the values in the Input Section, the model recalculate almost instantly, causing ch ...
1-Base-CaseTool KitChapter 11112118Note Calculations are automa
1-Base-CaseTool KitChapter 1111/21/18Note: Calculations are automatic, including for tables. This will make the calculations take longer to complete. You can disable automatic calculations for tables by following the steps shown here.Cash Flow Estimation and Risk AnalysisWorksheet 1-Base-CaseThis worksheet contains the base-case model. It calculates an expansion project's cash flows and performance measures using base-case, or most likely, values for the input variables. It also includes the basic analysis but with straight-line depreciation and bonus depreciation.Go to the menu "Files" at the top left of the menu bar.Select "Options" from the items in the first column.This will give you the screen shown below:The second worksheet (2-Sens) extends the basic model to include sensitivity analysis using Data Tables (we include a brief tutorial on the use of Data Tables). Worksheet 2-Sens also illustrates special cases of sensitivity analysis, including breakeven analysis, one-way data tables with multiple outputs, and two-way data tables.Worksheet 3a-Sens extends the basic model to include scenario analysis. Worksheet 3b-ScenMgr shows how to use Excel's Scenario Manager for scenario analysis.Worksheet 4-Sim extends the basic model to include simulation analysis. Worksheet 5-Replmt illustrates the analysis for a proposed cost-reducing replacement investment. Replacement decisions differ from expansion decisions because most of the cash flows are found by subtracting the old project's cash flows from those of the new project to calculate incremental cash flows for use in the analysis.Worksheet 6-DecTree extends the scenario analysis to examine two decision trees in which the decision is made in stages. The first one simply shows the situation where the firm can abandon the project if things are not working out and cash flows are negative. The second one involves a marketing study and a prototype of the final product designed to learn more about demand before deciding to go into full production.Worksheet Appendix 11-A provides depreciation tables as described in Appendix A of the textbook. It also shows examples using straight-line depreciation and bonus depreciation.11-1 Identifying Relevant Cash FlowsA proposal’s relevant project cash flows are the differences between the cash flows the firm will have if it implements the project versus the cash flows it will have if it rejects the project. These are called incremental cash flows.Choose "Formulas" in the first column.11-2 Analysis of an Expansion ProjectThis will give you the screen shown below.The figure below shows the inputs and key results of Project L (one of the projects whose cash flows are used in the previous chapter); the actual analysis is conducted further below in the worksheet. The values in the Inputs section are linked to the model, as are the values shown in Key Results. If you change any of the values in the Input Section, the model recalculate almost instantly, causing ch ...
Risk Analysis and Project Evaluation/Abshor.Marantika/Gita Mutiara Ovelia/3-3
Tugas Individu Manajemen Keuangan kelas 3-3 DIII Kebendaharaan Negara PKN STAN
Build a ModelBuild a Model112618Chapter10Problem23Gardial Fish.docx
Build a ModelBuild a Model11/26/18Chapter:10Problem:23Gardial Fisheries is considering two mutually exclusive investments. The projects' expected net cash flows are as follows:Expected Net Cash FlowsTimeProject AProject B0($375)($575)1($300)$1902($200)$1903($100)$1904$600$1905$600$1906$926$1907($200)$0a. If each project's cost of capital is 12%, which project should be selected? If the cost of capital is 18%, what project is the proper choice? @ 12% cost of capital @ 18% cost of capitalUse Excel's NPV function as explained in this chapter's Tool Kit. Note that the range does not include the costs, which are added separately.WACC =12%WACC =18%NPV A =NPV A =NPV B =NPV B =At a cost of capital of 12%, Project A should be selected. However, if the cost of capital rises to 18%, then the choice is reversed, and Project B should be accepted.b. Construct NPV profiles for Projects A and B.Before we can graph the NPV profiles for these projects, we must create a data table of project NPVs relative to differing costs of capital.Project AProject B0%2%4%6%8%10%12%14%16%18%20%22%24%26%28%30%c. What is each project's IRR?We find the internal rate of return with Excel's IRR function:IRR A =Note in the graph above that the X-axis intercepts are equal to the two projects' IRRs.IRR B =d. What is the crossover rate, and what is its significance?Cash flowTimedifferential012Crossover rate =34The crossover rate represents the cost of capital at which the two projects value, at a cost of capital of 13.14% is:
have the same net present value. In this scenario, that common net present567e. What is each project's MIRR at a cost of capital of 12%? At r = 18%? Hint: note that B is a 6-year project. @ 12% cost of capital @ 18% cost of capitalMIRR A =
DII Labs: Use Excel's MIRR function
DII Labs: The difference in cash flows between Project "A" and Project "B".
DII Labs: Net Present Value of "A" discounted at a WACC of 12%
DII Labs: The IRR for the Cash Flow Differential
DII Labs: Net Present Value of "A" discounted at a WACC of 18%
MIRR A =MIRR B =MIRR B =f. What is the regular payback period for these two projects?Project ATime period01234567Cash flow(375)(300)(200)(100)600$600$926($200)Cumulative cash flowIntermediate calculation for paybackPayback using intermediate calculationsProject BTime period01234567Cash flow-$575$190$190$190$190$190$190$0Cumulative cash flowIntermediate calculation for paybackPayback using intermediate calculationsPayback using PERCENTRANKOk because cash flows follow normal pattern.g. At a cost of capital of 12%, what is the discounted payback period for these two projects?WACC =12%Project ATime period01234567Cash flow-$375-$300-$200-$100$600$600$926-$200Disc. cash flowDisc. cum. cash flowIntermediate calculation for paybackPayback using intermediate calculationsProject BTime period0123456.
Compute IRR and NPV in Microsoft Excel 1.IRR Function .docx
Compute IRR and NPV in Microsoft Excel
1.IRR Function
Description:
The Microsoft Excel IRR function returns the internal rate of return for a series of cash flows. The cash
flows must occur at regular intervals, but do not have to be the same amounts for each interval.
Syntax
The syntax for the IRR function in Microsoft Excel is:
IRR(range, [estimated_irr] )
Parameters or Arguments
range
A range of cells that represent the series of cash flows.
estimated_irr
Optional. It is your guess at the internal rate of return. If this parameter is omitted, it
assumes an estimated_irr of 0.1 or 10%
Example (as Worksheet Function)
Let's look at some Excel IRR function examples and explore how to use the IRR function as a
worksheet function in Microsoft Excel:
Based on the Excel spreadsheet above:
This first example returns an internal rate of return of 28%. It assumes that you start a
business at a cost of $7,500. You net the following income for the first four years: $3,000,
$5,000, $1,200, and $4,000.
This next example returns an internal rate of return of 5%. It assumes that you start a
business at a cost of $10,000. You net the following income for the first three years: $3,400,
$6,500, and $1,000.
=IRR(B1:B4)
Result: 5%
2.NPV Function
Description
The Microsoft Excel NPV function returns the net present value of an investment.
Syntax
The syntax for the NPV function in Microsoft Excel is:
NPV( discount_rate, value1, [value2, ... value_n] )
Parameters or Arguments
discount_rate
The discount rate for the period.
value1, value2, ... value_n
The future payments and income for the investment (ie: cash flows). There can be up
to 29 values entered.
Note
Microsoft Excel's NPV function does not account for the intial cash outlay, or may account for
it improperly depending on the version of Excel. However, there is a workaround.
This workaround requires that you NOT include the initial investment in the future
payments/income for the investment (ie: value1, value2, ... value_n), but instead, you need to
subtract from the result of the NPV function, the amount of the initial investment.
The workaround formula is also different depending on whether the cash flows occur at the
end of the period (EOP) or at the beginning of the period (BOP).
If the cash flows occur at the end of the period (EOP), you would use the following formula:
=NPV( discount_rate, value1, value2, ... value_n ) - Initial Investment
If the cash flows occur at the beginning of the period (BOP), ou would use the following
formula:
=NPV( discount_rate, value2, ... value_n ) - Initial Investment + value1
Example (as Worksheet Function)
Let's look at some NPV examples and explore how to use the NPV function as a worksheet
function in Microsoft Excel:
This first example returns a net present value of $3,457.19. It assumes that you pay $7,500
as an initial investment . You then receive the following in ...
Compute IRR and NPV in Microsoft Excel 1.IRR Function .docx
Compute IRR and NPV in Microsoft Excel
1.IRR Function
Description:
The Microsoft Excel IRR function returns the internal rate of return for a series of cash flows. The cash
flows must occur at regular intervals, but do not have to be the same amounts for each interval.
Syntax
The syntax for the IRR function in Microsoft Excel is:
IRR(range, [estimated_irr] )
Parameters or Arguments
range
A range of cells that represent the series of cash flows.
estimated_irr
Optional. It is your guess at the internal rate of return. If this parameter is omitted, it
assumes an estimated_irr of 0.1 or 10%
Example (as Worksheet Function)
Let's look at some Excel IRR function examples and explore how to use the IRR function as a
worksheet function in Microsoft Excel:
Based on the Excel spreadsheet above:
This first example returns an internal rate of return of 28%. It assumes that you start a
business at a cost of $7,500. You net the following income for the first four years: $3,000,
$5,000, $1,200, and $4,000.
This next example returns an internal rate of return of 5%. It assumes that you start a
business at a cost of $10,000. You net the following income for the first three years: $3,400,
$6,500, and $1,000.
=IRR(B1:B4)
Result: 5%
2.NPV Function
Description
The Microsoft Excel NPV function returns the net present value of an investment.
Syntax
The syntax for the NPV function in Microsoft Excel is:
NPV( discount_rate, value1, [value2, ... value_n] )
Parameters or Arguments
discount_rate
The discount rate for the period.
value1, value2, ... value_n
The future payments and income for the investment (ie: cash flows). There can be up
to 29 values entered.
Note
Microsoft Excel's NPV function does not account for the intial cash outlay, or may account for
it improperly depending on the version of Excel. However, there is a workaround.
This workaround requires that you NOT include the initial investment in the future
payments/income for the investment (ie: value1, value2, ... value_n), but instead, you need to
subtract from the result of the NPV function, the amount of the initial investment.
The workaround formula is also different depending on whether the cash flows occur at the
end of the period (EOP) or at the beginning of the period (BOP).
If the cash flows occur at the end of the period (EOP), you would use the following formula:
=NPV( discount_rate, value1, value2, ... value_n ) - Initial Investment
If the cash flows occur at the beginning of the period (BOP), ou would use the following
formula:
=NPV( discount_rate, value2, ... value_n ) - Initial Investment + value1
Example (as Worksheet Function)
Let's look at some NPV examples and explore how to use the NPV function as a worksheet
function in Microsoft Excel:
This first example returns a net present value of $3,457.19. It assumes that you pay $7,500
as an initial investment . You then receive the following in.
CASE17CASE 19 Instructor VersionCopyright 2014 Health .docx
CASE17CASE 19 Instructor VersionCopyright 2014 Health Administration Press11/26/14 RN TEMPS, INC. Capital Structure AnalysisThis case illustrates the capital structure decision for a firm that begins with zero debtfinancing.The spreadsheet consists of two separate models: 1) Debt amount and ROE (Rows 35-43) uses income statements to examine the effects of financial leverage on ROE. This model uses a single (constant) interest rate input for all capital structure scenarios.2) Debt amount and Stock Price / CCC (Rows 45-56) examines the effects of debt financing on firm value, cost of capital, and stock price, assuming zero growth (perpetual cash flows.)The model consists of a complete base case analysis--no changes need to be madeto the existing MODEL-GENERATED DATA section. However, all values in the INPUT DATAsection of the student version have been replaced with zeros. Thus, students must determinethe appropriate input values and enter them into the model. These cells are colored red.When this is done, any error cells will be corrected and the base case solution will appear.Note that the model does not contain any risk analyses, so students will have to createtheir own if required by the case. Furthermore, students must create their own graphics(charts) as needed to present their results.The instructor version of the model contains a sheet (Figure 1) that plots both stock priceand cost of capital versus the dollar amount of debt financing. It also contains sheets thatcontain the inputs and outputs for the increased and decreased business risk scenarios.INPUT DATA: KEY OUTPUT:Tax rate40.0% Debt Amount and ROE Input:Debt Amount and ROE Analysis:Market value$12,000,000ExpectedCost of debt10.0%ROESD of ROEAll Equity15.0%1.8%ProbabilityEBIT25% Debt18.0%2.4%0.25$2,500,00050% Debt24.0%3.5%0.5$3,000,00075% Debt42.0%7.1%0.25$3,500,000 Debt Amount and Stock Price / CCC Input:Debt Amount and Stock Price / CCC Analysis:EBIT$3,000,000No. of shares 10,000,000Debt AmountCost of DebtCost of EquityDebt AmountStock PriceCCC $00.0%15.0%$0$1.20015.0%2,500,00010.0%15.5%2,500,000$1.31513.7%5,000,00011.0%16.5%5,000,000$1.39112.9%7,500,00013.0%18.0%7,500,000$1.42512.6%10,000,00016.0%20.0%10,000,000$1.42012.7%12,500,00020.0%25.0%12,500,000$1.37013.1%MODEL-GENERATED DATA: Debt and ROE Analysis: All Equity 25% DebtProbability0.250.500.250.250.500.25EBIT$2,500,000$3,000,000$3,500,000$2,500,000$3,000,000$3,500,000Interest000300,000300,000300,000 EBT$2,500,000$3,000,000$3,500,000$2,200,000$2,700,000$3,200,000Taxes1,000,0001,200,0001,400,000880,0001,080,0001,280,000Net Income$1,500,000$1,800,000$2,100,000$1,320,000$1,620,000$1,920,000ROE12.5%15.0%17.5%14.7%18.0%21.3%TIE Ration.a.n.a.n.a.8.3310.0011.67E(ROE)15.0%18.0%Std dev of ROE1.8%2.4%Coefficient of variation0.120.13 50% Debt 75% DebtProbability0.250.500.250.250.500.25EBIT$2,500,000$3,000,000$3,500,000$2,500,000$3,000,000$3, ...
Ch05 P24 Build a Model Spring 1, 201372212Chapter 5. Ch 05 P24 B.docx
Ch05 P24 Build a Model Spring 1, 20137/22/12Chapter 5. Ch 05 P24 Build a ModelExcept for charts and answers that must be written, only Excel formulas that use cell references or functions will be accepted for credit. Numeric answers in cells will not be accepted.A 20-year, 8% semiannual coupon bond with a par value of $1,000 may be called in 5 years at a call price of $1,040. The bond sells for $1,100. (Assume that the bond has just been issued.)Basic Input Data:Years to maturity:20Periods per year:2Periods to maturity:Coupon rate:8%Par value:$1,000Periodic payment:Current price$1,100Call price:$1,040Years till callable:5Periods till callable:a. What is the bond's yield to maturity?Periodic YTM =Annualized Nominal YTM = Hint: This is a nominal rate, not the effective rate. Nominal rates are generally quoted.b. What is the bond's current yield?Current yield = Hint: Write formula in words.Current yield =/ Hint: Cell formulas should refer to Input SectionCurrent yield =(Answer)c. What is the bond's capital gain or loss yield?Cap. Gain/loss yield =- Hint: Write formula in words.Cap. Gain/loss yield =- Hint: Cell formulas should refer to Input SectionCap. Gain/loss yield =(Answer)Note that this is an economic loss, not a loss for tax purposes.d. What is the bond's yield to call?Here we can again use the Rate function, but with data related to the call.Peridodic YTC =Annualized Nominal YTC =This is a nominal rate, not the effective rate. Nominal rates are generally quoted.The YTC is lower than the YTM because if the bond is called, the buyer will lose the difference between the call price and the current price in just 4 years, and that loss will offset much of the interest imcome. Note too that the bond is likely to be called and replaced, hence that the YTC will probably be earned.NOW ANSWER THE FOLLOWING NEW QUESTIONS:e. How would the price of the bond be affected by changing the going market interest rate? (Hint: Conduct a sensitivity analysis of price to changes in the going market interest rate for the bond. Assume that the bond will be called if and only if the going rate of interest falls below the coupon rate. That is an oversimplification, but assume it anyway for purposes of this problem.)Nominal market rate, r:8%Value of bond if it's not called:Value of bond if it's called: The bond would not be called unless r<coupon.We can use the two valuation formulas to find values under different r's, in a 2-output data table, and then use an IFstatement to determine which value is appropriate:Value of Bond If:Actual value,Not calledCalledconsideringRate, r$0.00$0.00call likehood:0%$0.00$0.00$0.002%$0.00$0.00$0.004%$0.00$0.00$0.006%$0.00$0.00$0.008%$0.00$0.00$0.0010%$0.00$0.00$0.0012%$0.00$0.00$0.0014%$0.00$0.00$0.0016%$0.00$0.00$0.00f. Now assume the date is 10/25/2010. Assume further that a 12%, 10-year bond was issued on 7/1/2010, pays interest semiannually (January 1 and July 1), and sells for $1,100. Use your ...
Benchmarking using replacement asset value
Benchmarking using Replacement Asset Value. A benchmark is the end distance point from the start. In the world of maintenance it is the name for the targets that an organisation sets for itself in an improvement program. Benchmarking is often against world-best practice and it is used to provide direction and focus in an organisation’s efforts to improve. When RAV is chosen as the benchmark it means that the annual cost of maintaining the plant will be measured against the value of the plant. RAV is a percentage of the cost to replace the plant. The lower the RAV the more effective the maintenance effort.
1. Payback Period and Net Present Value[LO1, 2] If a project with .docx
1. Payback Period and Net Present Value[LO1, 2] If a project with conventional cash flows has a payback period less than the project’s life, can you definitively state the algebraic sign of the NPV? Why or why not? If you know that the discounted payback period is less than the project’s life, what can you say about the NPV? Explain.
Internal Rate of Return[LO5] Concerning IRR:
a. Describe how the IRR is calculated, and describe the information this measure provides about a sequence of cash flows. What is the IRR criterion decision rule?
b. What is the relationship between IRR and NPV? Are there any situations in which you might prefer one method over the other? Explain.
c. Despite its shortcomings in some situations, why do most financial managers use IRR along with NPV when evaluating projects? Can you think of a situation in which IRR might be a more appropriate measure to use than NPV? Explain.
14. Net Present Value[LO1] It is sometimes stated that “the net present value approach assumes reinvestment of the intermediate cash flows at the required return.” Is this claim correct? To answer, suppose you calculate the NPV of a project in the usual way. Next, suppose you do the following:
a. Calculate the future value (as of the end of the project) of all the cash flows other than the initial outlay assuming they are reinvested at the required return, producing a single future value figure for the project.
b. Calculate the NPV of the project using the single future value calculated in the previous step and the initial outlay. It is easy to verify that you will get the same NPV as in your original calculation only if you use the required return as the reinvestment rate in the previous step.
17. Comparing Investment Criteria Consider the following two mutually exclusive projects:
Year Cash Flow (A) Cash Flow (B)
If you apply the payback criterion, which investment will you choose? Why?
b. If you apply the discounted payback criterion, which investment will you choose? Why?
c. If you apply the NPV criterion, which investment will you choose? Why?
d. If you apply the IRR criterion, which investment will you choose? Why?
e. If you apply the profitability index criterion, which investment will you choose? Why?
5. Equivalent Annual Cost [LO4]
1. When is EAC analysis appropriate for comparing two or more projects?
2. Why is this method used?
3 .Are there any implicit assumptions required by this method that you find troubling? Explain.
6. Cash Flow and Depreciation [LO1] “When evaluating projects, we’re concerned with only the relevant incremental after tax cash flows. Therefore, because depreciation is a noncash expense, we should ignore its effects when evaluating projects.” Critically evaluate this statement.
QUESTION AND PROBLEMS
1. Relevant Cash Flows [LO1] Parker & Stone, Inc., is looking at setting up a new manufacturing plant in South Park to produce garden tools. The company bought some land six years ago for $5 ...
Schneider, Arnold, (2012) Managerial Accounting, United States, .docx
Schneider, Arnold, (2012) Managerial Accounting, United States, Bridgepoint Education Inc
The Evaluation Methods
The evaluation methods discussed here are:
1.
Present value methods (also called discounted cash-flow methods).
(a)
Net present value method (NPV).
(b)
Internal rate of return method (IRR).
2.
Payback period method.
3.
Accounting rate of return method.
Nearly all managerial accountants agree that methods using present value (Methods 1a and 1b) give the best assessment of long-terminvestments. Methods that do not involve the time value of money (Methods 2 and 3) have serious flaws; however, since they are commonlyused for investment evaluation, their strengths and weaknesses are discussed.
Net Present Value Method
The net present value (NPV) method includes the time value of money by using an interest rate that represents the desired rate of return or, atleast, sets a minimum acceptable rate of return. The decision rule is:
If the present value of incremental net cash inflows is greater than the incremental
investment net cash outflow, approve the project.
Using Tables 1 and 2 found at the end of this chapter, the net cash flows for each year are brought back (i.e., discounted) to Year 0 andsummed for all years. An interest rate must be specified. This rate is often viewed as the cost of funds needed to finance the project and is theminimum acceptable rate of return. To discount the cash flows, we use the interest rate and the years that the cash flows occur to obtain theappropriate present value factors from the present value tables. A portion of Table 1 appears below showing the present value factors (theshaded numbers), corresponding to an interest rate of 12 percent, for each year during the Clairmont Timepieces project's life.
Periods
(n)
1%
2%
4%
5%
6%
8%
10%
12%
14%
15%
16%
0
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1
0.990
0.980
0.962
0.952
0.943
0.926
0.909
0.893
0.877
0.870
0.862
2
0.980
0.961
0.925
0.907
0.890
0.857
0.826
0.797
0.769
0.756
0.743
3
0.971
0.942
0.889
0.864
0.840
0.794
0.751
0.712
0.675
0.658
0.641
4
0.961
0.924
0.855
0.823
0.792
0.735
0.683
0.636
0.592
0.572
0.552
5
0.951
0.906
0.822
0.784
0.747
0.681
0.621
0.567
0.519
0.497
0.476
6
0.942
0.888
0.790
0.746
0.705
0.630
0.564
0.507
0.456
0.432
0.410
7
0.933
0.871
0.760
0.711
0.665
0.583
0.513
0.452
0.400
0.376
0.354
8
0.923
0.853
0.731
0.677
0.627
0.540
0.467
0.404
0.351
0.327
0.305
9
0.914
0.837
0.703
0.645
0.592
0.500
0.424
0.361
0.308
0.284
0.263
10
0.905
0.820
0.676
0.614
0.558
0.463
0.386
0.322
0.270
0.247
0.227
These present value factors are used in Figure 10.2 to discount the yearly cash flows to their present values. In Figure 10.2, the net cashinvestment ($95,000) is subtracted from the sum of cash-inflow present values ($137,331). When the residual is positive, the project's rate ofreturn (ROR) is greater than the minimum acceptable ROR. If:
Present value of incremental net cash inflows ≥ Incremental investment cash outf.
AgendaComprehending risk when modeling investment (project) de.docx
Agenda
Comprehending risk when modeling investment (project) decisions
Standalone Risk
Market Risk
1
1
Project Risk
Standalone Risk: Risk based on uncertainty of a projects cash flows
Sensitivity
Scenarios
Breakeven
Simulations
Market Risk: Risk of the project as seen by a well diversified investor
Beta
2
Sensitivity, Scenario, and Break-Even
Each allows us to look behind the NPV number to see how stable our estimates are.
Breakeven: sales required to breakeven
Accounting break-even: sales volume at which net income = 0
Cash break-even: sales volume at which operating cash flow = 0
Financial break-even: sales volume at which net present value = 0
Sensitivity: how sensitive a particular NPV calculation is to changes in an input variable holding all other assumptions are held constant
Scenario: examine impact on NPV given a confluence of factors
When working with spreadsheets, try to build your model so that you can adjust variables in a single cell and have the NPV calculations update accordingly.
3
3
Monte Carlo Simulation
A more sophisticated variation of the scenario analysis is Monte Carlo simulation.
In a Monte Carlo simulation, analysts specify a range or a distribution of potential outcomes for each of the model’s assumptions.
Pick a probability distribution for each input variable (units, price, variable costs, etc).
The computer program will pick a random value from each input variable, calculate the NPV and store the result. This is a trial.
Repeat the process many times, saving the input variables and the output (NPV).
End result: Probability distribution of NPV based on sample of simulated values.
4
Example
5
6
When a firm with both debt and equity invests in an asset similar to its existing assets (business), the WACC is the appropriate discount rate to use in NPV calculations.
In conglomerates, the WACC reflects the return that the firm must earn on average across all its assets to satisfy investors, but using the WACC to discount cash flows of a particular investment leads to mistakes.
Any project’s cost of capital depends on the use to which the capital is being put—not the source.
Therefore, it depends on the risk of the project and not the risk of the company.
When a firm invests in an asset that is different from its existing assets, it should look for pure-play firms to find the right discount rate.
6
Finding the Right Discount Rate
6
You are a financial analyst at General Electric and are preparing a cost of equity estimate for a project analysis using NPV:
CAPM = Risk Free Rate + Beta * Market Risk Premium
9.5% = 3.0% + 1.1 * 5.9%
Lines of Business
Financial Services
Power Generation
Aviation
Transportation
Health Care
Consumer Goods
When evaluating a new power generation investment for GE, which cost of capital should be used?
Capital Budgeting & Project Risk
7
Beta
1.8
0.6
1.2
1.3
0.8
1.1
7
17
Capital Budgeti.
7.12Chapter 7 Problem 12a). Complete the spreadsheet below by esti.docx
7.12Chapter 7 Problem 12a). Complete the spreadsheet below by estimating the project's annual after tax cash flow.b). What is the investment's net present value at a discount rate of 10 percent?c). What is the investment's internal rate of return?d). How does the internal rate of return change if the discount rate equals 20 percent?e). How does the internal rate of return change if the growth rate in EBIT is 8 percent instead of 3 percent?Facts and AssumptionsEquipment initial cost $$ 350,000Depreciable life yrs.7Expected life yrs.10Salvage value $$0Straight line depreciationEBIT in year 128,000Tax rate38%Growth rate in EBIT3%Discount rate10%Year012345678910Initial cost350,000Annual depreciation50,00050,00050,00050,00050,00050,00050,000EBIT28,00028,84029,70530,59631,51432,46033,43334,43635,47036,534Net present value @ 10%Internal rate of return
7.13Chapter 7 Problem 13In many financial transactions, interest is computed and charged more than once a year. Interest on corporate bonds, for example, is usually payable every six months. Consider a loan transaction in which interest is charged at the rate of 1 percent per month. Sometimes such a transaction is described as having an interest rate of 12 percent per annum. More precisely, this rate should be described as a nominal 12 percent per annum coumpounded monthly.Clearly, it is desirable to recognize the difference between 1 percent per month compounded monthly and 12 percent per annum compounded annually. If $1,000 is borrowed with interest at 1 percent per month compounded monthly, the amount due in one year is:F = $1,000(1.01)12 = $1,000(1.1268) = $1,126.80 This compares to F = $1,000(1+.12) =$1,120.00 for annual compounding.Hence, the monthly compounding has the same effect on the year-end amount due as the charging of a rate of 12.68 percent compounded annually. 12.68 percent is referred to as the effective interest rate. To generalize, if interest is compounded m times a year at an interest rate of r/m per compounding period. Then,The nominal interest rate per annum, or the APR = m(r/m) = r.The effective interest rate per annum,or the EAR = (1+r/m)m - 1.Consider a $100,000, 30 year, fixed-rate, 9 percent, home mortgage requiring monthly payments.a. The monthly interest rate on the mortgage is 9%/12 months = .75%. What is the APR on the mortgage?b. What is the EAR on the mortgage?c. The borrower's payment book will look something like the following. Complete the entries for the first 6 months.Outstanding Balance Beginning of MonthMonthly paymentInterest duePrincipal paymentOutstanding Balance End of MonthDate01-31$100,00002-2803-3104-3005-3106-30d. After paying on this mortgage for 15 years, what will be the remaining principal outstanding? e. Suppose after 15 years the borrower has the opportunity to refinance the remaining principal on the mortgage with a new 15-year mortgage carrying an interest rate of 7 1/8%. Refinancing will involve $250 in costs and "points.
1-2paragraphsapa formatWelcome to Module 6. Divers.docx
1-2
paragraphs
apa format
Welcome to Module 6. Diversity can help ensure that a team has the skills and knowledge necessary for the successful completion of tasks. Diverse teams, as long as they are well managed, tend to be more creative and achieve goals more efficiently. Leaders must understand and appreciate the diversity that exists in their team. Answer the following question as you think about the diversity that exists within your own organization.
How does this diversity help your team achieve its goals?
Have you noticed any barriers to team unity that may be attributed to the diversity of team members' backgrounds?
How has your background and experience prepared you to be an effective leader in an organization that holds diversity and inclusion as core to its mission and values?
.
1-Post a two-paragraph summary of the lecture; 2- Review the li.docx
1-Post a two-paragraph summary of the lecture;
2- Review the links and select one. Briefly explain how they support our curse.
http://www.fldoe.org/
http://www.eric.ed.gov/ERICWebPortal/Home.portal
http://firn.edu/doe/sas/ftce/ftcecomp.htm
Use APA 7.
each work separately.
.
1-What are the pros and cons of parole. Discuss!2-Discuss ways t.docx
1-What are the pros and cons of parole. Discuss!
2-Discuss ways to improve parole so that offenders have a better chance of being successful in the community
3-What are the barriers that parolees face when they return to the community that contribute to them failing. Give a relative example!
Submit in 3 paragraphs
.
1-page (max) proposal including a Title, Executive Summary, Outline,.docx
1-page (max) proposal including a Title, Executive Summary, Outline, Team members, Task Assignment and Duration (who is doing what part). Include your anticipated dataset(s) and techniques/software. Please provide a list of the main references you want to use for your project in any appropriate format, e.g. Vancouver or APA style.
proposal is due by october 7th 2020 at 12pm est
project by 25th october
instructions for project are in the folder
.
1-Identify the benefits of sharing your action research with oth.docx
1-Identify the benefits of sharing your action research with others.
-How does sharing your action research assist you in achieving your goal to improve the lives of your students?
2-Describe the criteria used to judge action research.
-What determines if your action research study gets published?
3-Identify one Web site resource (ERIC)and describe how it assisted you in designing, implementing, evaluating, writing and/or sharing your action research. Choose any one of the Web site sources listed in chapter 10(last page of attachment)
4-Why does Mills suggest in the last chapter of his book that this is really the beginning of your work?( start page 291)
Source:
Mills, G. E. (2000). Action research: A guide for the teacher researcher. Prentice-Hall, Inc., One Lake Street, Upper Saddle River, New Jersey 07458.
.
More Related Content
Similar to Build a ModelSolution81315Note when creating student version, b.docx
Compute IRR and NPV in Microsoft Excel 1.IRR Function .docx
Compute IRR and NPV in Microsoft Excel
1.IRR Function
Description:
The Microsoft Excel IRR function returns the internal rate of return for a series of cash flows. The cash
flows must occur at regular intervals, but do not have to be the same amounts for each interval.
Syntax
The syntax for the IRR function in Microsoft Excel is:
IRR(range, [estimated_irr] )
Parameters or Arguments
range
A range of cells that represent the series of cash flows.
estimated_irr
Optional. It is your guess at the internal rate of return. If this parameter is omitted, it
assumes an estimated_irr of 0.1 or 10%
Example (as Worksheet Function)
Let's look at some Excel IRR function examples and explore how to use the IRR function as a
worksheet function in Microsoft Excel:
Based on the Excel spreadsheet above:
This first example returns an internal rate of return of 28%. It assumes that you start a
business at a cost of $7,500. You net the following income for the first four years: $3,000,
$5,000, $1,200, and $4,000.
This next example returns an internal rate of return of 5%. It assumes that you start a
business at a cost of $10,000. You net the following income for the first three years: $3,400,
$6,500, and $1,000.
=IRR(B1:B4)
Result: 5%
2.NPV Function
Description
The Microsoft Excel NPV function returns the net present value of an investment.
Syntax
The syntax for the NPV function in Microsoft Excel is:
NPV( discount_rate, value1, [value2, ... value_n] )
Parameters or Arguments
discount_rate
The discount rate for the period.
value1, value2, ... value_n
The future payments and income for the investment (ie: cash flows). There can be up
to 29 values entered.
Note
Microsoft Excel's NPV function does not account for the intial cash outlay, or may account for
it improperly depending on the version of Excel. However, there is a workaround.
This workaround requires that you NOT include the initial investment in the future
payments/income for the investment (ie: value1, value2, ... value_n), but instead, you need to
subtract from the result of the NPV function, the amount of the initial investment.
The workaround formula is also different depending on whether the cash flows occur at the
end of the period (EOP) or at the beginning of the period (BOP).
If the cash flows occur at the end of the period (EOP), you would use the following formula:
=NPV( discount_rate, value1, value2, ... value_n ) - Initial Investment
If the cash flows occur at the beginning of the period (BOP), ou would use the following
formula:
=NPV( discount_rate, value2, ... value_n ) - Initial Investment + value1
Example (as Worksheet Function)
Let's look at some NPV examples and explore how to use the NPV function as a worksheet
function in Microsoft Excel:
This first example returns a net present value of $3,457.19. It assumes that you pay $7,500
as an initial investment . You then receive the following in.
CASE17CASE 19 Instructor VersionCopyright 2014 Health .docx
CASE17CASE 19 Instructor VersionCopyright 2014 Health Administration Press11/26/14 RN TEMPS, INC. Capital Structure AnalysisThis case illustrates the capital structure decision for a firm that begins with zero debtfinancing.The spreadsheet consists of two separate models: 1) Debt amount and ROE (Rows 35-43) uses income statements to examine the effects of financial leverage on ROE. This model uses a single (constant) interest rate input for all capital structure scenarios.2) Debt amount and Stock Price / CCC (Rows 45-56) examines the effects of debt financing on firm value, cost of capital, and stock price, assuming zero growth (perpetual cash flows.)The model consists of a complete base case analysis--no changes need to be madeto the existing MODEL-GENERATED DATA section. However, all values in the INPUT DATAsection of the student version have been replaced with zeros. Thus, students must determinethe appropriate input values and enter them into the model. These cells are colored red.When this is done, any error cells will be corrected and the base case solution will appear.Note that the model does not contain any risk analyses, so students will have to createtheir own if required by the case. Furthermore, students must create their own graphics(charts) as needed to present their results.The instructor version of the model contains a sheet (Figure 1) that plots both stock priceand cost of capital versus the dollar amount of debt financing. It also contains sheets thatcontain the inputs and outputs for the increased and decreased business risk scenarios.INPUT DATA: KEY OUTPUT:Tax rate40.0% Debt Amount and ROE Input:Debt Amount and ROE Analysis:Market value$12,000,000ExpectedCost of debt10.0%ROESD of ROEAll Equity15.0%1.8%ProbabilityEBIT25% Debt18.0%2.4%0.25$2,500,00050% Debt24.0%3.5%0.5$3,000,00075% Debt42.0%7.1%0.25$3,500,000 Debt Amount and Stock Price / CCC Input:Debt Amount and Stock Price / CCC Analysis:EBIT$3,000,000No. of shares 10,000,000Debt AmountCost of DebtCost of EquityDebt AmountStock PriceCCC $00.0%15.0%$0$1.20015.0%2,500,00010.0%15.5%2,500,000$1.31513.7%5,000,00011.0%16.5%5,000,000$1.39112.9%7,500,00013.0%18.0%7,500,000$1.42512.6%10,000,00016.0%20.0%10,000,000$1.42012.7%12,500,00020.0%25.0%12,500,000$1.37013.1%MODEL-GENERATED DATA: Debt and ROE Analysis: All Equity 25% DebtProbability0.250.500.250.250.500.25EBIT$2,500,000$3,000,000$3,500,000$2,500,000$3,000,000$3,500,000Interest000300,000300,000300,000 EBT$2,500,000$3,000,000$3,500,000$2,200,000$2,700,000$3,200,000Taxes1,000,0001,200,0001,400,000880,0001,080,0001,280,000Net Income$1,500,000$1,800,000$2,100,000$1,320,000$1,620,000$1,920,000ROE12.5%15.0%17.5%14.7%18.0%21.3%TIE Ration.a.n.a.n.a.8.3310.0011.67E(ROE)15.0%18.0%Std dev of ROE1.8%2.4%Coefficient of variation0.120.13 50% Debt 75% DebtProbability0.250.500.250.250.500.25EBIT$2,500,000$3,000,000$3,500,000$2,500,000$3,000,000$3, ...
Ch05 P24 Build a Model Spring 1, 201372212Chapter 5. Ch 05 P24 B.docx
Ch05 P24 Build a Model Spring 1, 20137/22/12Chapter 5. Ch 05 P24 Build a ModelExcept for charts and answers that must be written, only Excel formulas that use cell references or functions will be accepted for credit. Numeric answers in cells will not be accepted.A 20-year, 8% semiannual coupon bond with a par value of $1,000 may be called in 5 years at a call price of $1,040. The bond sells for $1,100. (Assume that the bond has just been issued.)Basic Input Data:Years to maturity:20Periods per year:2Periods to maturity:Coupon rate:8%Par value:$1,000Periodic payment:Current price$1,100Call price:$1,040Years till callable:5Periods till callable:a. What is the bond's yield to maturity?Periodic YTM =Annualized Nominal YTM = Hint: This is a nominal rate, not the effective rate. Nominal rates are generally quoted.b. What is the bond's current yield?Current yield = Hint: Write formula in words.Current yield =/ Hint: Cell formulas should refer to Input SectionCurrent yield =(Answer)c. What is the bond's capital gain or loss yield?Cap. Gain/loss yield =- Hint: Write formula in words.Cap. Gain/loss yield =- Hint: Cell formulas should refer to Input SectionCap. Gain/loss yield =(Answer)Note that this is an economic loss, not a loss for tax purposes.d. What is the bond's yield to call?Here we can again use the Rate function, but with data related to the call.Peridodic YTC =Annualized Nominal YTC =This is a nominal rate, not the effective rate. Nominal rates are generally quoted.The YTC is lower than the YTM because if the bond is called, the buyer will lose the difference between the call price and the current price in just 4 years, and that loss will offset much of the interest imcome. Note too that the bond is likely to be called and replaced, hence that the YTC will probably be earned.NOW ANSWER THE FOLLOWING NEW QUESTIONS:e. How would the price of the bond be affected by changing the going market interest rate? (Hint: Conduct a sensitivity analysis of price to changes in the going market interest rate for the bond. Assume that the bond will be called if and only if the going rate of interest falls below the coupon rate. That is an oversimplification, but assume it anyway for purposes of this problem.)Nominal market rate, r:8%Value of bond if it's not called:Value of bond if it's called: The bond would not be called unless r<coupon.We can use the two valuation formulas to find values under different r's, in a 2-output data table, and then use an IFstatement to determine which value is appropriate:Value of Bond If:Actual value,Not calledCalledconsideringRate, r$0.00$0.00call likehood:0%$0.00$0.00$0.002%$0.00$0.00$0.004%$0.00$0.00$0.006%$0.00$0.00$0.008%$0.00$0.00$0.0010%$0.00$0.00$0.0012%$0.00$0.00$0.0014%$0.00$0.00$0.0016%$0.00$0.00$0.00f. Now assume the date is 10/25/2010. Assume further that a 12%, 10-year bond was issued on 7/1/2010, pays interest semiannually (January 1 and July 1), and sells for $1,100. Use your ...
Benchmarking using replacement asset value
Benchmarking using Replacement Asset Value. A benchmark is the end distance point from the start. In the world of maintenance it is the name for the targets that an organisation sets for itself in an improvement program. Benchmarking is often against world-best practice and it is used to provide direction and focus in an organisation’s efforts to improve. When RAV is chosen as the benchmark it means that the annual cost of maintaining the plant will be measured against the value of the plant. RAV is a percentage of the cost to replace the plant. The lower the RAV the more effective the maintenance effort.
1. Payback Period and Net Present Value[LO1, 2] If a project with .docx
1. Payback Period and Net Present Value[LO1, 2] If a project with conventional cash flows has a payback period less than the project’s life, can you definitively state the algebraic sign of the NPV? Why or why not? If you know that the discounted payback period is less than the project’s life, what can you say about the NPV? Explain.
Internal Rate of Return[LO5] Concerning IRR:
a. Describe how the IRR is calculated, and describe the information this measure provides about a sequence of cash flows. What is the IRR criterion decision rule?
b. What is the relationship between IRR and NPV? Are there any situations in which you might prefer one method over the other? Explain.
c. Despite its shortcomings in some situations, why do most financial managers use IRR along with NPV when evaluating projects? Can you think of a situation in which IRR might be a more appropriate measure to use than NPV? Explain.
14. Net Present Value[LO1] It is sometimes stated that “the net present value approach assumes reinvestment of the intermediate cash flows at the required return.” Is this claim correct? To answer, suppose you calculate the NPV of a project in the usual way. Next, suppose you do the following:
a. Calculate the future value (as of the end of the project) of all the cash flows other than the initial outlay assuming they are reinvested at the required return, producing a single future value figure for the project.
b. Calculate the NPV of the project using the single future value calculated in the previous step and the initial outlay. It is easy to verify that you will get the same NPV as in your original calculation only if you use the required return as the reinvestment rate in the previous step.
17. Comparing Investment Criteria Consider the following two mutually exclusive projects:
Year Cash Flow (A) Cash Flow (B)
If you apply the payback criterion, which investment will you choose? Why?
b. If you apply the discounted payback criterion, which investment will you choose? Why?
c. If you apply the NPV criterion, which investment will you choose? Why?
d. If you apply the IRR criterion, which investment will you choose? Why?
e. If you apply the profitability index criterion, which investment will you choose? Why?
5. Equivalent Annual Cost [LO4]
1. When is EAC analysis appropriate for comparing two or more projects?
2. Why is this method used?
3 .Are there any implicit assumptions required by this method that you find troubling? Explain.
6. Cash Flow and Depreciation [LO1] “When evaluating projects, we’re concerned with only the relevant incremental after tax cash flows. Therefore, because depreciation is a noncash expense, we should ignore its effects when evaluating projects.” Critically evaluate this statement.
QUESTION AND PROBLEMS
1. Relevant Cash Flows [LO1] Parker & Stone, Inc., is looking at setting up a new manufacturing plant in South Park to produce garden tools. The company bought some land six years ago for $5 ...
Schneider, Arnold, (2012) Managerial Accounting, United States, .docx
Schneider, Arnold, (2012) Managerial Accounting, United States, Bridgepoint Education Inc
The Evaluation Methods
The evaluation methods discussed here are:
1.
Present value methods (also called discounted cash-flow methods).
(a)
Net present value method (NPV).
(b)
Internal rate of return method (IRR).
2.
Payback period method.
3.
Accounting rate of return method.
Nearly all managerial accountants agree that methods using present value (Methods 1a and 1b) give the best assessment of long-terminvestments. Methods that do not involve the time value of money (Methods 2 and 3) have serious flaws; however, since they are commonlyused for investment evaluation, their strengths and weaknesses are discussed.
Net Present Value Method
The net present value (NPV) method includes the time value of money by using an interest rate that represents the desired rate of return or, atleast, sets a minimum acceptable rate of return. The decision rule is:
If the present value of incremental net cash inflows is greater than the incremental
investment net cash outflow, approve the project.
Using Tables 1 and 2 found at the end of this chapter, the net cash flows for each year are brought back (i.e., discounted) to Year 0 andsummed for all years. An interest rate must be specified. This rate is often viewed as the cost of funds needed to finance the project and is theminimum acceptable rate of return. To discount the cash flows, we use the interest rate and the years that the cash flows occur to obtain theappropriate present value factors from the present value tables. A portion of Table 1 appears below showing the present value factors (theshaded numbers), corresponding to an interest rate of 12 percent, for each year during the Clairmont Timepieces project's life.
Periods
(n)
1%
2%
4%
5%
6%
8%
10%
12%
14%
15%
16%
0
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1
0.990
0.980
0.962
0.952
0.943
0.926
0.909
0.893
0.877
0.870
0.862
2
0.980
0.961
0.925
0.907
0.890
0.857
0.826
0.797
0.769
0.756
0.743
3
0.971
0.942
0.889
0.864
0.840
0.794
0.751
0.712
0.675
0.658
0.641
4
0.961
0.924
0.855
0.823
0.792
0.735
0.683
0.636
0.592
0.572
0.552
5
0.951
0.906
0.822
0.784
0.747
0.681
0.621
0.567
0.519
0.497
0.476
6
0.942
0.888
0.790
0.746
0.705
0.630
0.564
0.507
0.456
0.432
0.410
7
0.933
0.871
0.760
0.711
0.665
0.583
0.513
0.452
0.400
0.376
0.354
8
0.923
0.853
0.731
0.677
0.627
0.540
0.467
0.404
0.351
0.327
0.305
9
0.914
0.837
0.703
0.645
0.592
0.500
0.424
0.361
0.308
0.284
0.263
10
0.905
0.820
0.676
0.614
0.558
0.463
0.386
0.322
0.270
0.247
0.227
These present value factors are used in Figure 10.2 to discount the yearly cash flows to their present values. In Figure 10.2, the net cashinvestment ($95,000) is subtracted from the sum of cash-inflow present values ($137,331). When the residual is positive, the project's rate ofreturn (ROR) is greater than the minimum acceptable ROR. If:
Present value of incremental net cash inflows ≥ Incremental investment cash outf.
AgendaComprehending risk when modeling investment (project) de.docx
Agenda
Comprehending risk when modeling investment (project) decisions
Standalone Risk
Market Risk
1
1
Project Risk
Standalone Risk: Risk based on uncertainty of a projects cash flows
Sensitivity
Scenarios
Breakeven
Simulations
Market Risk: Risk of the project as seen by a well diversified investor
Beta
2
Sensitivity, Scenario, and Break-Even
Each allows us to look behind the NPV number to see how stable our estimates are.
Breakeven: sales required to breakeven
Accounting break-even: sales volume at which net income = 0
Cash break-even: sales volume at which operating cash flow = 0
Financial break-even: sales volume at which net present value = 0
Sensitivity: how sensitive a particular NPV calculation is to changes in an input variable holding all other assumptions are held constant
Scenario: examine impact on NPV given a confluence of factors
When working with spreadsheets, try to build your model so that you can adjust variables in a single cell and have the NPV calculations update accordingly.
3
3
Monte Carlo Simulation
A more sophisticated variation of the scenario analysis is Monte Carlo simulation.
In a Monte Carlo simulation, analysts specify a range or a distribution of potential outcomes for each of the model’s assumptions.
Pick a probability distribution for each input variable (units, price, variable costs, etc).
The computer program will pick a random value from each input variable, calculate the NPV and store the result. This is a trial.
Repeat the process many times, saving the input variables and the output (NPV).
End result: Probability distribution of NPV based on sample of simulated values.
4
Example
5
6
When a firm with both debt and equity invests in an asset similar to its existing assets (business), the WACC is the appropriate discount rate to use in NPV calculations.
In conglomerates, the WACC reflects the return that the firm must earn on average across all its assets to satisfy investors, but using the WACC to discount cash flows of a particular investment leads to mistakes.
Any project’s cost of capital depends on the use to which the capital is being put—not the source.
Therefore, it depends on the risk of the project and not the risk of the company.
When a firm invests in an asset that is different from its existing assets, it should look for pure-play firms to find the right discount rate.
6
Finding the Right Discount Rate
6
You are a financial analyst at General Electric and are preparing a cost of equity estimate for a project analysis using NPV:
CAPM = Risk Free Rate + Beta * Market Risk Premium
9.5% = 3.0% + 1.1 * 5.9%
Lines of Business
Financial Services
Power Generation
Aviation
Transportation
Health Care
Consumer Goods
When evaluating a new power generation investment for GE, which cost of capital should be used?
Capital Budgeting & Project Risk
7
Beta
1.8
0.6
1.2
1.3
0.8
1.1
7
17
Capital Budgeti.
7.12Chapter 7 Problem 12a). Complete the spreadsheet below by esti.docx
7.12Chapter 7 Problem 12a). Complete the spreadsheet below by estimating the project's annual after tax cash flow.b). What is the investment's net present value at a discount rate of 10 percent?c). What is the investment's internal rate of return?d). How does the internal rate of return change if the discount rate equals 20 percent?e). How does the internal rate of return change if the growth rate in EBIT is 8 percent instead of 3 percent?Facts and AssumptionsEquipment initial cost $$ 350,000Depreciable life yrs.7Expected life yrs.10Salvage value $$0Straight line depreciationEBIT in year 128,000Tax rate38%Growth rate in EBIT3%Discount rate10%Year012345678910Initial cost350,000Annual depreciation50,00050,00050,00050,00050,00050,00050,000EBIT28,00028,84029,70530,59631,51432,46033,43334,43635,47036,534Net present value @ 10%Internal rate of return
7.13Chapter 7 Problem 13In many financial transactions, interest is computed and charged more than once a year. Interest on corporate bonds, for example, is usually payable every six months. Consider a loan transaction in which interest is charged at the rate of 1 percent per month. Sometimes such a transaction is described as having an interest rate of 12 percent per annum. More precisely, this rate should be described as a nominal 12 percent per annum coumpounded monthly.Clearly, it is desirable to recognize the difference between 1 percent per month compounded monthly and 12 percent per annum compounded annually. If $1,000 is borrowed with interest at 1 percent per month compounded monthly, the amount due in one year is:F = $1,000(1.01)12 = $1,000(1.1268) = $1,126.80 This compares to F = $1,000(1+.12) =$1,120.00 for annual compounding.Hence, the monthly compounding has the same effect on the year-end amount due as the charging of a rate of 12.68 percent compounded annually. 12.68 percent is referred to as the effective interest rate. To generalize, if interest is compounded m times a year at an interest rate of r/m per compounding period. Then,The nominal interest rate per annum, or the APR = m(r/m) = r.The effective interest rate per annum,or the EAR = (1+r/m)m - 1.Consider a $100,000, 30 year, fixed-rate, 9 percent, home mortgage requiring monthly payments.a. The monthly interest rate on the mortgage is 9%/12 months = .75%. What is the APR on the mortgage?b. What is the EAR on the mortgage?c. The borrower's payment book will look something like the following. Complete the entries for the first 6 months.Outstanding Balance Beginning of MonthMonthly paymentInterest duePrincipal paymentOutstanding Balance End of MonthDate01-31$100,00002-2803-3104-3005-3106-30d. After paying on this mortgage for 15 years, what will be the remaining principal outstanding? e. Suppose after 15 years the borrower has the opportunity to refinance the remaining principal on the mortgage with a new 15-year mortgage carrying an interest rate of 7 1/8%. Refinancing will involve $250 in costs and "points.
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COLLAPSE
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Special Methods: Any appropriate behaviors other than SIB will be reinforced through a specific amount of time (every five minutes). Reinforcement is only given when the individual does not engage in SIB behaviors.
Risks
Notes
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2 The parents might be concerned for the safety of themselves and their child.
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3 Appropriate behaviors will be taught and replace the SIB behavior.
4 Least intrusive intervention
4 Using reinforcement to decrease the problem behavior and increase appropriate behaviors. This is a least restrictive method of treatment.
5 Parent training and involvement
5 Parents will feel confident about implementing this evidence based treatment at home. This will can lead to an increase a buy in from the family and they will feel comfortable implementing other interventions in the future.
Summary: DRO is an intervention that is used when the client does not engage in the problem behavior (SIB) (Bailey & Burch, 2016). Reinforcement should only be given to the individual after a certain amount of time that the client is not engaging in the problem behavior; in this case it should be after five minutes of the client not engaging in SIB. The person who is implementing this treatment should not reinforce the problem behavior. The benefits of implementing DRO outweigh the risks of implementing DRO. DRO is a good intervention to use when decreasing SIB behavior. Although there are some risks, the individual who is implementing DRO should have the knowledge, training and experience and be confident when implementing DRO ( Bailey & Burch, 2016).
Reference
Bailey, J. S., & Burch, M. R. (2016).
Ethics for behavior analysts
(3rd ed.). New York, NY: Routledge.
PSY 7711
3 days ago
Emily Gentile
Unit 9 Discussion
C.
1- Pathogenesis 2- Organs affected in the body 3- Chain of i.docx
1- Pathogenesis
2- Organs affected in the body
3- Chain of infection and its Links associated: Infectious agent, Reservoirs, Portal of Exit, Route of Transmission, portal of Entry, and Susceptible Host. All must to be defined in the chosen agent.
4- Incidence, Prevalence, and Prevention of this infectious disease
5- Treatment if possible
6- Please answer, being a Nurse. “How are you going to break down the chain of infection of the selected microorganisms, to avoid Cross Contamination ?
.
1- I can totally see where there would be tension between.docx
1- I can totally see where there would be tension between these two, especially in today’s world. I am no expert on religion or science for that matter, but I do feel like some of the tension is unnecessary. I feel that the two can work to benefit our patients by balancing them with the needs of the patient. Let’s take my kids for instance, if they were sick with some known treatable disease there would be no other option in my mind to treat them with science and medicine that has been proven to work. I wouldn’t only pray for them to get better and not do anything about it, but I would pray for them and do whatever was necessary to help my family deal with the stress and worry of a child being sick. Here we have used them both to our benefit and they each serve a different purpose and effectiveness. Thanks again for your post!
2-My perception of the tension between science and religion is founded at first glance and then not when looked at more closely. Science and religion can coincide in health care if respected for their own strengths and limitations. I feel that a healthy balance of both can benefit our patients providing different needs when they’re needed. I have seen with my own eyes CRP markers drop in an infant receiving antibiotic treatment and I have also seen an infant that wasn’t supposed to live by scientific probability actually make it and thrive with prayer being the only obvious intervention. So, trying to single out one over the other as more effective than the other seems less beneficial than trying to work them both in when the patient requires such help.
I feel that science is good for some of the more usual cases and things we feel we can help with its information, and I also feel that we can use religion to help a patient with their mental aspects of healing. We can quantify an improvement in a patient through lab levels and such, but it's hard to do the same with religion and how a patient uses that tool as comfort or however they use it in their lives. “Some observational studies suggest that people who have regular spiritual practices tend to live longer. Another study points to a possible mechanism: interleukin (IL)-6. Increased levels of IL-6 are associated with an increased incidence of disease. A research study involving 1700 older adults showed that those who attended church were half as likely to have elevated levels of IL-6. The authors hypothesized that religious commitment may improve stress control by offering better coping mechanisms, richer social support, and the strength of personal values and worldview” (NCBI, 2001). In this example we see the benefits were surveyed to be founded, but the exact workings aren’t exactly known. The great thing about science is that usually we have some tangible results that are repeatable and there’s safety to be found in that. The great thing about religion is that we can have faith in whatever we believe in and that’s all that’s needed. It's our.
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1- One of the most difficult challenges leaders face is to integrate their task and relationship behaviors. Do you see this as a challenge in your own leadership? How do you integrate task and relationship behaviors?
2- If you were to change in an effort to improve your leadership, what aspect of your style would you change? Would you try to be more task oriented or more relationship oriented?
.
1- Design one assignment of the Word Find (education word) and the o.docx
1- Design one assignment of the Word Find (education word) and the one of Using Digital Technology in two separate attachments, each named. Note that a sample of each is located in attachment.
2- Read the lecture and post a one-paragraph summary of the lecture. (Graphic organizers).
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1- This chapter suggests that emotional intelligence is an interpers.docx
1- This chapter suggests that emotional intelligence is an interpersonal leadership whether you agree or disagree with this assumption. As you think about your own leadership, do emotions help or hinder your role as a leader? Discuss.
2- One unique aspect of leadership skills is that they can be practiced. List and briefly describe three things you could do to improve administrative skills.
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1-2 pages APA format1. overall purpose of site 2. resources .docx
1-2 pages APA format
1. overall purpose of site
2. resources available to social workers on the site and
3. how these resources can be specifically used in either the social worker assessment of or the social work intervention with children. Make certain to fully reference the site in a separate page. must include 3 headings that address Each requiremen.
.
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1-Define Energy.
2- What is Potential energy?
3- What is Kinetic energy?
4-Define Metabolism and name the two main types of metabolism.
5-Define an Enzyme and name the most important classes of Enzymes.
6- Name the three Metabolic Pathways.
7-What is Aerobic cellular respiration?
8-What is Anaerobic respiration?
9- Define Fermentation.
10.Name the final Products of Anaerobic Respiration.
1. - What is the main function of enzymes in our body?
2. - Please name the 6 types of enzymes:
3. - What is Energy of Activation, for the enzymes?
4. - Factors that affect enzyme activity include:
5. - What is a cofactor:
.
1- Find one quote from chapter 7-9. Explain why this quote stood.docx
1- Find one quote from chapter 7-9. Explain why this quote stood out to you. What is its importance?
2- Discussion 7-9
1-Share your quote and ideas.
2- “violence is the only lever big enough to move the world”
3-Compare and contrast Elwood and Turner.
4-Why is Turner right? Why is he wrong?
5- Theme. reading vs reals world, inside vs outside, optimism vs pessimism, violence, division of lower class among racial lines.
7- “violence is the only lever big enough to move the world”
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1-Confucianism2-ShintoChoose one of the religious system.docx
1-Confucianism
2-Shinto
Choose one of the religious systems above; find some point of interest to discuss (350 wds). You may use your textbook OR any other reputable encyclopedia or source. ALWAYS CITE your source.
To support your response you are required to provide at least one supporting reference with proper citation
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Build a ModelSolution81315Note when creating student version, b.docx
- 1. Build a Model Solution 8/13/15Note: when creating student version, be sure to delete Scenario Summary worksheet. Also delete the Best and Worse case scenarios from the Scenario Manager. Also delete this message in the student version.Chapter:11Estimating Cash Flows and Analyzing RiskProblem:18Webmasters.com has developed a powerful new server that would be used for corporations’ Internet activities. It would cost $10 million at Year 0 to buy the equipment necessary to manufacture the server. The project would require net working capital at the beginning of each year in an amount equal to 10% of the year's projected sales; for example, NWC0 = 10%(Sales1). The servers would sell for $24,000 per unit, and Webmasters believes that variable costs would amount to $17,500 per unit. After Year 1, the sales price and variable costs will increase at the inflation rate of 3%. The company’s nonvariable costs would be $1 million at Year 1 and would increase with inflation. The server project would have a life of 4 years. If the project is undertaken, it must be continued for the entire 4 years. Also, the project's returns are expected to be highly
- 2. correlated with returns on the firm's other assets. The firm believes it could sell 1,000 units per year. The equipment would be depreciated over a 5-year period, using MACRS rates. The estimated market value of the equipment at the end of the project’s 4-year life is $500,000. Webmasters’ federal-plus- state tax rate is 40%. Its cost of capital is 10% for average-risk projects, defined as projects with a coefficient of variation of NPV between 0.8 and 1.2. Low-risk projects are evaluated with a WACC of 8%, and high-risk projects at 13%.a. Develop a spreadsheet model, and use it to find the project’s NPV, IRR, and payback. Input Data (in thousands of dollars)Equipment cost$10,000Key Results:Net operating working capital/Sales10% NPV =$3,463First year sales (in units)1,000 IRR =21.1%Sales price per unit$24.00 Payback =2.90Variable cost per unit (excl. depr.)$17.50Nonvariable costs (excl. depr.)$1,000Market value of equipment at Year 4$500Tax rate40%WACC10%Inflation in prices and costs3.0%Estimated salvage value at year 4$500Intermediate Calculations01234Units sold1,0001,0001,0001,000Sales price per unit (excl. depr.)$24.00$24.72$25.46$26.23Variable costs per unit (excl. depr.)$17.50$18.03$18.57$19.12Nonvariable costs (excl. depr.)1,0001,0301,0611,093Sales revenue$24,000$24,720$25,462$26,225Required level of net operating working capital$2,400$2,472$2,546$2,623$0Basis for depreciation$10,000Annual equipment depr.
- 3. rate20.00%32.00%19.20%11.52%Annual depreciation expense$2,000$3,200$1,920$1,152Ending Bk Val: Cost – Accum Dep'rn$10,000$8,000$4,800$2,880$1,728Salvage value$500Profit (or loss) on salvage-$1,228Tax on profit (or loss)-$491Net cash flow due to salvage$991YearsCash Flow Forecast01234Sales revenue$24,000$24,720$25,462$26,225Variable costs17,50018,02518,56619,123Nonvariable operating costs1,0001,0301,0611,093Depreciation (equipment)2,0003,2001,9201,152Oper. income before taxes (EBIT)$3,500$2,465$3,915$4,858Taxes on operating income (40%)1,4009861,5661,943Net operating profit after taxes$2,100$1,479$2,349$2,915Add back depreciation2,0003,2001,9201,152Equipment purchases- $10,000Cash flow due to change in NOWC-$2,400-$72-$74- $76$2,623Net cash flow due to salvage$991Net Cash Flow (Time line of cash flows)- $12,400$4,028$4,605$4,193$7,681Key Results: Appraisal of the Proposed ProjectNet Present Value (at 10%) =$3,463IRR =21.09%MIRR =16.99%Payback = 2.90Discounted Payback = 3.23Data for Payback YearsYears01234Net cash flow- $12,400$4,028$4,605$4,193$7,681Cumulative CF -$12,400- $8,372-$3,767$425$8,106Part of year required for payback1.001.000.900.00Data for Discounted Payback YearsYears01234Net cash flow-
- 4. $12,400$4,028$4,605$4,193$7,681Discounted cash flow- $12,400$3,662$3,806$3,150$5,246Cumulative CF -$12,400- $8,738-$4,933-$1,783$3,463Part of year required for discounted payback1.001.001.000.23b. Now conduct a sensitivity analysis to determine the sensitivity of NPV to changes in the sales price, variable costs per unit, and number of units sold. Set these variables’ values at 10% and 20% above and below their base-case values. Include a graph in your analysis.% DeviationSALES PRICENote about data tables. The data in the column input should NOT be input using a cell reference to the column input cell. For example, the base case Sales Price in Cell B95 should be the number $24.00 you should NOT have the formula =D28 in that cell. This is because you'll use D28 as the column input cell in the data table and if Excel tries to iteratively replace Cell D28 with the formula =D28 rather than a series of numbers, Excel will calculate the wrong answer. Unfortunately, Excel won't tell you that there is a problem, so you'll just get the wrong values for the data table!fromBaseNPVBase Case$24.00$3,463-20%$19.20-$5,893- 10%$21.60- $1,2150%$24.00$3,46310%$26.40$8,14120%$28.80$12,820% DeviationVARIABLE COST% Deviation1st YEAR UNIT SALESfromBaseNPVfromBaseNPVBase Case$17.50$3,463Base Case1,000$3,463-20%$14.00$10,401-20%800$1,045- 10%$15.75$6,932-
- 5. 10%900$2,2540%$17.50$3,4630%1,000$3,46310%$19.25- $610%1,100$4,67320%$21.00- $3,47520%1,200$5,882DeviationNPV at Different Deviations from BasefromSalesVariableBase CasePriceCost/UnitUnits Sold-20%-$5,893$10,401$1,045-10%- $1,215$6,932$2,2540%$3,463$3,463$3,46310%$8,141- $6$4,67320%$12,820- $3,475$5,882Range$18,712$13,876$4,837c. Now conduct a scenario analysis. Assume that there is a 25% probability that best-case conditions, with each of the variables discussed in Part b being 20% better than its base-case value, will occur. There is a 25% probability of worst-case conditions, with the variables 20% worse than base, and a 50% probability of base- case conditions.SalesUnitVariableScenarioProbabilityPriceSalesCost sNPVBest Case25%$28.801,200$14.00$25,435Base Case50%$24.001,000$17.50$3,463 Worst Case 25%$19.20800$21.00($11,990)Expected NPV =$5,093Standard Deviation = $13,332Coefficient of Variation = Std Dev / Expected NPV =2.62d. If the project appears to be more or less risky than an average project, find its risk-adjusted NPV, IRR, and payback.CV range of firm's average-risk project:0.8to1.2Low-risk WACC =8%WACC =10%High-risk WACC =13%Risk-adjusted WACC =13%Risk adjusted NPV =$2,387IRR =21.09%
- 6. Kenneth D. Jackson: IRR does not change. Payback =2.90 Kenneth D. Jackson: Paypack does not change. e. On the basis of information in the problem, would you recommend that the project be accepted?At this point, the project looks risky but acceptable. There is a good chance that it will produce a positive NPV, but there is also a chance that the NPV could be quite low.The problem gave no information about the size of the project relative to the total corporation. If the company were quite large, and this were but one of many projects, and if the projects were independent of one another, then it should be accepted. However, if the firm were relatively small, and this project under bad conditions could bankrupt the company, then the decision is not clear. If management is highly risk averse, they might turn it down. However, well- diversified investors would probably prefer to see it accepted. So, to maximize the stock price, it should be accepted.We indicate in the problem that this project's returns will tend to be highly correlated with the firm's other projects' returns. Thus, its stand-alone risk (which is what we have been analyzing) also reflects its within-firm risk. If this were not true, then we would need to make further risk adjustments. Sensitivity Analysis
- 7. Sales price-0.2-0.100.10.2-5892.876254354208- 1214.76951847552123463.33721740317748141.4439532818797 12819.550689160566VC-0.2- 0.100.10.210401.2073765453136932.27229697424633463.3372 174031774-5.5978621678877971-3474.5329417389548Units- 0.2- 0.100.10.21044.99390478791972254.16556109554953463.3372 1740317744672.50887371080535881.6805300184315 Percentage Deviation from Base NPV ($) Scenario SummaryScenario SummaryCurrent Values:BaseBestWorstCreated by Michael C. Ehrhardt on 11/13/2001Created by Michael C. Ehrhardt on 11/13/2001 Modified by Michael C. Ehrhardt on 11/13/2001Created by Michael C. Ehrhardt on 11/13/2001Changing Cells:$D$291,0001,0001,200800$D$30$24.00$24.00$28.80$19. 20$D$31$17.50$17.50$14.00$21.00Result Cells:$D$79$3,463$3,463$25,435($11,990)$D$8021.09%21.09 %76.96%ERROR:#NUM!$D$8116.99%16.99%43.42%- 41.46%Notes: Current Values column represents values of changing cells attime Scenario Summary Report was created. Changing cells for eachscenario are highlighted in gray.