MBA 631: Module Five Problems
Problem 5-1:
Your task is
to analyze two mutually exclusive projects:
Year Cash Flow Project X Cash Flow Project Z
-0- -400,000 -50,000
1 25,000 20,000
2 60,000 15,000
3 60,000 20,000
4 540,000 20,000
Whichever project you chose, if any, you require a 15% return on your
investment.
A] Using the
payback criterion, which investment should you chose? Why?
B] Using the
discounted payback criterion, which investment should you chose? Why?
C] Using the
NPV criterion, which investment should you chose? Why?
D] Using the
IRR criterion, which investment should you chose? Why?
E] Using the
profitability index criterion, which investment should you chose? Why?
F] Based on
your analysis in (A) thru (E), which investment should you finally chose? Why?
Problem 5-2:
You are
required to submit a bid to supply 200,000,000 widgets per year to the State of
Illinois for the next five years. Your company has an idle tract of real estate
that cost $1,500,000 ten years ago; if your company sold the land today, it
would generate $3,000,000 after the taxes were paid. The land can be sold for
$3,500,000 after taxes in five years. You will need to install $4,900,000 in
new plant and equipment to actually produce the widgets; this plant and
equipment will be depreciated straight-line to zero over the projects five year
life. The equipment can be sold for $610,000 at the end of the project. You
will need $500,000 in initial working capital for the project, and an
additional investment of $60,000 in every year thereafter. Your production
costs are .6 cents per widget and you will have fixed costs of $800,000 per
year. If your tax rate is 34% and your required return is 14%, what bid price
per widget should you submit? MBA 631: Module Five ProblemsProblem 5-1:Your task is
to analyze two mutually exclusive projects:
Year Cash Flow Project X Cash Flow Project Z
-0- -400,000 -50,000
1 25,000 20,000
2 60,000 15,000
3 60,000 20,000
4 540,000 20,000
Whichever project you chose, if any, you require a 15% return on your
investment.A] Using the
payback criterion, which investment should you chose? Why?B] Using the
discounted payback criterion, which investment should you chose? Why?C] Using the
NPV criterion, which investment should you chose? Why?D] Using the
IRR criterion, which investment should you chose? Why?E] Using the
profitability index criterion, which investment should you chose? Why?F] Based on
your analysis in (A) thru (E), which investment should you finally chose? Why?Problem 5-2:You are
required to submit a bid to supply 200,000,000 widgets per year to the State of
Illinois for the next five years. Your company has an idle tract of real estate
that cost $1,500,000 ten years ago; if your company sold the land today, it
would generate $3,000,000 after the taxes were paid. The land can be sold for
$3,500,000 after taxes in five years. You will need to install $4,900,000 in
new plant and equipment to actually produce the widgets; this plant and
equipment will be depreciated straight-line to zero over the projects five year
life. The equipment can be sold for $610,000 at the end of the project. You
will need $500,000 in initial working capital for the project, and an
additional investment of $60,000 in every year thereafter. Your production
costs are .6 cents per widget and you will have fixed costs of $800,000 per
year. If your tax rate is 34% and your required return is 14%, what bid price
per widget should you submit?
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