You are a financial analyst for the Brittle Company. The director of capital budgeting has asked you to analyze two proposed capital investments: Projects X and Y. Each project has a cost of $10,000, and the cost of capital for each is 12%. The projects expected net cash flows are shown in the table below.
Expected Net Cash Flows
Year Project X Project Y
0 $10,000 $10,000
1- 6,500 3,500
2- 3,000 3,500
3- 3,000 3,500
4- 1,000 3,500
a. Use the Homework Student Workbook to calculate each projects net present value (NPV), internal rate of return (IRR), modified internal rate of return (MIRR), and profitability index (PI).
b.Which project or projects should be accepted if they are independent?
c.Which project or projects should be accepted if they are mutually exclusive?
3-1 Question 1
Assignment 3-1, Question 1
1a. Calculate the value of the stock today:
1. Calculate the PV of the dividends paid during the supernatural growth period:
$ % $
D1= 1.15 x 1.15 = 1.3225
D2= x =
D3= x =
PV of Dividends = + + = $
2. Find the PV of Turbo’s stock price at the end of Year 3:
P3^ = ____D4____ = __ _D3(1+g)______
PV of P3^ = = $
3. Sum the two components to find the value of the stock today:
Value of current stock (P0) = $ + $ = $
1b. Calculate P1^ and P2^.
P1^ = $ + $ + $ = $
P2^ = $ + $ = $
1c. Calculate the dividend yields and capital gains yield for Years 1, 2, and 3.
Year Dividend Yield + Capital Gains Yield = Total Return
1 $1.3225/$25.23 ≈ 5.24% + ($26.93 – $25.23) / $25.23 ≈ 6.74% ≈ 12%
2 + ≈
3 + ≈
3-1 Question 2
Assignment 3-1, Question 2
rps = %
3-1 Question 3
Assignment 3-1, Question 3
3a. Calculate McCaffrey’s value of operations.
Vop = FCF(1+g) = = $
WACC – g
3b. Calculate the company’s total value.
Total Value = Value of Operations + Value of nonoperating assets
= $ + $ = $
3c. Calculate the estimated value of common equity.
Value of equity = Total value – Value of debt
= $ – $ = $
3d. Calculate the estimated per-share stock price.
Price per share = Value of Equity ÷ Number of Shares
= $ ÷ $ = $
5-2 Question 1
Assignment 5-2, Question 1
Net Present Value (NPV):
NPVx = -$10,000 + $ + $ + $ + $ = $
NPVy = -$10,000 + $ + $ + $ + $ = $
Internal Rate of Return (IRR):
To solve for each project’s IRR, find the discount rates that equate each NPV to zero:
IRRx = %
IRRy = %
Modified Internal Rate of Return (MIRR):
To obtain each project’s MIRR, begin by finding each project’s terminal value (TV) of cash inflows:
TVx = $6,500 (1.12)^3 + $ + $ + $1,000 = $
TVy = $ + $ + $ + $3,500 = $
Now, each project’s MIRR is the discount rate that equates the PV of the TV to each project’s cost, $10,000:
MIRRx = %
MIRRy = %
Profitability Index (PI):
To obtain each project’s PI, divide its present value of future cash flows by its initial cost. The PV of future cash flows can be found from the NPV calculated earlier:
PVx = NPVx + Cost of X
= $ + $10,000 = $
PVy = NPVy + Cost of Y
= $ + $ = $
PIx = PVx ÷ Cost of X
= $ ÷ $ =
PIy = PVy ÷ Cost of Y
= $ ÷ $ =
FIN 550 Homework Guidelines and Rubric This course uses homework problems to demonstrate competence and allow for practice with calculations unique to finance. Complete all your calculations in the Homework Student Workbook. Then summarize your findings and discuss the implications of the findings for the business or potential business transaction. Follow the instructions for each question in Modules Three and Five and complete the assigned work. Guidelines for Submission: Each homework assignment must be submitted as a 1-page Microsoft Word document with double spacing, 12-point Times New Roman font, and one-inch margins. Any sources should be cited according to APA style. In addition, your Homework Student Workbook must be submitted to demonstrate all calculations.
Critical Elements Proficient (100%) Needs Improvement (70%) Not Evident (0%) Value
Accuracy of Calculations
Includes detailed calculations, including demonstration of each step taken to accurately complete the problem
Includes calculations that are inaccurate and/or does not include all of the steps needed
Includes calculations that are inaccurate and does not provide an explanation of calculations
Analysis: Implications Includes an explanation of the implications of the findings for the business and/or potential business transaction
Explains the implications of the findings, but there are inaccuracies or explanation is insufficient
Does not include an explanation of the findings
Articulation of Response
Submission has no major errors related to citations, grammar, spelling, syntax, or organization
Submission has major errors related to citations, grammar, spelling, syntax, or organization that negatively impact readability and articulation of main ideas
Submission has critical errors related to citations, grammar, spelling, syntax, or organization that prevent understanding of ideas
Earned Total 100%