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Zcmc6122 Set 1 Sem 1 2022-2023 Individual Assignment 4

The document contains several questions related to capital budgeting for a class assignment. Students are asked to answer some of the questions and submit their responses by a given deadline. The questions cover topics like calculating net present value and internal rate of return for a mining project, comparing two investment projects, and evaluating a proposal to produce a component internally rather than purchasing it from a supplier.

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186 views9 pages

Zcmc6122 Set 1 Sem 1 2022-2023 Individual Assignment 4

The document contains several questions related to capital budgeting for a class assignment. Students are asked to answer some of the questions and submit their responses by a given deadline. The questions cover topics like calculating net present value and internal rate of return for a mining project, comparing two investment projects, and evaluating a proposal to produce a component internally rather than purchasing it from a supplier.

Uploaded by

Mira Denis
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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IA#4: Capital Budgeting Questions

Below are several questions on capital budgeting. Please attempt to answer


them all if possible (half of those questions also acceptable for this assignment)
and send your answers to UKMFOLIO as stated in the Individual Assignment 4.
These questions are good practice for your test this Sunday. You are welcome
to discuss with your classmates for answers.

The submission date is on or before 10 FEBRUARY 2023 11.59pm. Thank you

(PY) ZCMC6122 SET 1 SEM 1 2022-2023 1


Concrete Mining Corporations (CMC) has discovered a gold deposit and must
decide whether to go ahead and develop the deposit using sulfuric acid
extraction which could result in environmental damage. Before proceeding with
the extraction, CMC must spend $900,000 for new equipment and pay
$165,000 for its installation. The mine will generate an estimated $350,000
each year for the next 5 years. CMC’s cost of capital is 14%.

a) What are the project’s NPV and IRR?


b) Should the project be undertaken if environmental impacts were not a
consideration?
c) How should environmental effects be considered when evaluating this
project, and any other projects? How might these concepts affect the
decision in part (b)?

(PY) ZCMC6122 SET 1 SEM 1 2022-2023 2


Brealey et al (2014) Chapter 6:
1.#15 (pg 152)
After spending $3 million on research, Better Mousetraps has devloped a new trap.
The project requires an initial investment in plant and equipment of $6 million.
This investment will be depreciated straight-line over five years to a value of zero,
but when the project comes to an end in five years, the equipment can, in fact,
be sold for $500,000. The firm believes that working capital at each date must be
maintained at 10% of next year’s forecasted sales. Production costs are estimated
at $1.50 per trap and the traps will be sold for $4 each. (There are no marketing
expenses). Sales forecasts are given in the following table. The firm pays tax at
35% and the required return on the project is 12%. What is the NPV?
Year 0 1 2 3 4 5
Sales (millions of traps) 0 0.5 0.6 1.0 1.0 0.6

(PY) ZCMC6122 SET 1 SEM 1 2022-2023 3


2. Standard Watches (SW), a manufacturer of watches, is considering the
selection of one from two mutually exclusive investment projects, each with an
estimated five-year life. Project A costs $1,616,000 and is forecast to generate
annual cash flows of $500,000. Its estimated residual value after five (5) years is
$301,000. Project B, costing $556,000 and with a scrap value of $56,000, should
generate annual cash flows of $200,000. The company operates a straight-line
depreciation policy and discounts cash flows at 15% per annum.

SW uses four (4) investment appraisal techniques,: payback period, net present
value, internal rate of return, and accounting rate of return (i.e., average
accounting profit to initial book value of investment).

Make the appropriate calculations and give reasons for your investment
advice.

(PY) ZCMC6122 SET 1 SEM 1 2022-2023 4


3. #18 (pg 152)
A widget manufacturer currently produces 200,000 units a year. It buys widget
lids from an outside supplier at a price of $2 a lid. The plant manager believes
that it would be cheaper to make these lids rather than buy them. Direct
production costs are estimated to be only $1.50 a lid. The necessary machinery
would cost $150,000 and would last 10 years. This investment could be written
off for tax purposes using the seven-year tax depreciation schedule. The plant
manager estimates that the operation would require additional working capital
of $30,000 but argues that this sum can be ignored since it is recoverable at the
end of the 10 years. If the company pays tax at a rate of 35% and the
opportunity cost of capital is 15%, would you support the plant manager’s
proposal? State clearly any additional assumptions that you need to make.

(PY) ZCMC6122 SET 1 SEM 1 2022-2023 5


(PY) ZCMC6122 SET 1 SEM 1 2022-2023 6
(PY) ZCMC6122 SET 1 SEM 1 2022-2023 7
(PY) ZCMC6122 SET 1 SEM 1 2022-2023 8
(PY) ZCMC6122 SET 1 SEM 1 2022-2023 9

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