Powerful Wind, Inc. is a wind turbine manufacturer that is considering three investment projects: I, II, and III, that will cost $2,500,000, $2,300,000, and $3,700,000, respectively. The projects have an expected life of three, five, and seven years, correspondingly. The firm’s Vice President of Finance has estimated the probability distribution for each project’s first after-tax cash flow (ATCF1) as shown in the following table:
The Vice President of Finance uses the risk-adjusted discount technique to evaluate investment projects. He allocates risk premiums based on the coefficient of variation of each project’s after-tax cash flows according to the following table:
1. Each project’s after-tax cash flows are expected to grow at an annual rate of inflation of 3%.
a) Determine the expected cash flow, standard deviation, and coefficient of variation of each project in Year 1.
b) If the firm’s WACC is 15%, what is the appropriate risk-adjusted required rate of return of each project?
c) Using the appropriate discount rates, determine the payback period, discounted payback period, NPV, PI, IRR, and MIRR for each project.
d) If the projects are mutually exclusive, which project should be accepted? Answer the same question assuming they are independent projects.
6. Use the data of the previous problem to perform the following analysis:
a) Perform a sensitivity analysis using a Data Table. Determine the NPV, IRR, and PI as the ATCF1 takes on each possible outcome.
b) Determine the expected value and standard deviation of the NPVs, PI, and IRR of all projects.
c) Determine the coefficient of variation of the NPV, PI, and IRR of all projects.
d) Calculate the probability of a negative NPV, a PI less than one, and an IRR less than the required return for all projects.
e) Based on your results for parts (a), (b), (c), and (d), which project should be accepted?
You might also like to view...
If the Open-Market Desk at the Fed buys securities, the most likely effect is that the
A. federal funds rate decreases. B. primary credit discount rate decreases. C. primary credit discount rate increases. D. federal funds rate increases.
People who can appear charming or pleasant in the short term, but in the long term they have difficulty trusting others and fail to develop effective working relationships are commonly referred to as ______.
A. risk takers B. narcissistic C. psychopaths D. high Mach
A company that manufactures custom bridal gowns will use a ???????????????????? costing system to track production costs
Which is a criticism of empowerment?
A. just a management fad B. misunderstanding of the term C. can exploit workers D. all of these