Please help and show work c) weighted average cost of all financing sources d) c
ID: 2801093 • Letter: P
Question
Please help and show work c) weighted average cost of all financing sources d) cost of capital from the specific capital source QUANTITATIVE AND ANALYTICAL PROBLEMS (50 points total) your work: nw all problems by writing legibly in the space provided below. To receive full credit, you must show formulas, calculator inputs, and the result. Partial credit will be for the correct a ete. 21) Capital budgeting techniques (15 points total) vestment of $,000,000 and is expected to generate the following after-tax incremental operating cash inflows: $2,500,000 in year S2,300,000 in year 2; $2,200,000 in year 3; and $1,500,000 in year 4. The firm will have to perform an environmental remediation atthe end of year 4 at a cost of SI .300,000. The firm's weighted average cost of capital is 12% APR. The company's executives are committed to maximizing the firm's value but are also looking to recover their investment within 3 years or less. Given this information, answer the following questions: (a) Calculate the project's discounted payback period (3 points)Explanation / Answer
0 1 2 3 4 Initial investment -5000000 Incremental cash inflows 2500000 2300000 2200000 1500000 Discount rate 12% 12% 12% 12% 12% Terminal cost -1300000 (i) Payback period = Year cash flows Cumulative cash flows 0 -5000000 0 1 2500000 2500000 2 2300000 4800000 3 2200000 7000000 4 200000 7200000 Payback period = 2 + [(5000000-4800000/2200000) = 2 + (2000000/2200000) = 2.090909 years (ii) NPV = Years 0 1 2 3 4 Initial investment -5000000 Incremental cash inflows 2500000 2300000 2200000 1500000 Terminal cost -1300000 Total cash flows -5000000 2500000 2300000 2200000 200000 PV factors 1 0.8929 0.7972 0.7118 0.6355 PV of cash flows -5000000 2232142.86 1833545.92 1565916.55 127103.62 NPV = 758708.9364 (iii) IRR = if we discount cash flows @ IRR NPV = 0 Year Net cash flows PV Factors Present value 20% 21% 20% 21% 0 -5000000.00 1 1 -5000000 -5000000 1 2500000.00 0.833333 0.826446281 2083333.33 2066115.7 2 2300000.00 0.694444 0.683013455 1597222.22 1570930.95 3 2200000.00 0.578704 0.56447393 1273148.15 1241842.65 4 200000.00 0.482253 0.46650738 96450.6173 93301.476 50154.321 -27809.228 r= NPV = 20% 50154.32099 r 0 21% -27809.228 r-20/21 -20 = (0-50154.321)/(-27809.228-50154.321) r- 20 = 0.643305 x 1 r = 20 + 0.6433 r = 20.64% Approx (iv) PI can be calculated by 2 ways - Total cash inflow/ Initial Investment or 1 + (NPV/Initial investment) = 1.151741787 Total cash inflows = Year PV of Cash flows 1 2232142.86 2 1833545.92 3 1565916.55 4 127103.62 5758708.94 PI = 5758708.94/5000000= 1.151741787 (v) Project should be accepted as the - NPV is positive PI is more then 1 IRR more then discount rate Payback period is less then 3 years Please provide feedback…. Thanks in advance…. :-)