公司理财solutions to assignment 3

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1、CorporateFinanceSolutionstoAssignment3SolutionstoAssignment31.1)2)Wealreadyknowfromquestion1)thatNPV=3,289.86>0forareturnof8.5%.ThismeansthatwehavetoincreasethereturntodecreasetheNPVtozero.Tryr=9%,→NPV=1,888.56Tryr=9.5%,→NPV=509.35Tryr=10%,→NPV=-848.23Wecanconcl

2、udethat9.5%8.50percent→Accepttheproject.3)2.YearProjectAcashflowProjectBcashflowDifference(A-B)0-$75,000-$60,000-$15,0001$30,000$25,000$5,0002$35

3、,000$30,000$5,0003$35,000$25,000$10,000NPVofthedifferencecashflows:Thecrossoverrateis13.94%.Forratesgreaterthan13.94%,ProjectBwillhavethehigherNPVandshouldbeaccepted.Takeforexampleareturnof15%,→NPVA=$565.05andNPVB=$861.35.Forratessmallerthan13.94%,ProjectAwillha

4、vethehigherNPVandshouldbeaccepted.3.OCF=(sales-cost)×(1-T)+Depr.×T=(110,000-70,000)×0.65+(80,000/4)×0.35=33,0004.First,calculateOCF:Annualdepreciation=$618,000÷3=$206,000Taxes=($265,000-$206,000)×0.34=$20,060OCF=$265,000-$20,060=$244,940Second,calculateinitialca

5、shflow(i.e.investment)andafter-taxsalvagevalue:Initialcashflow=-$618,000+(-$23,000)=-$641,000After-taxsalvagevalue=$60,000×(1-0.34)=$396001CorporateFinanceSolutionstoAssignment3Third,listallCFFA:Year0:-$641,000Year1-2:$244,940Year3:$244,940+$39,600+$23,000=$307,

6、5405.First,calculateinitialcashflowandafter-taxsalvagevalueInitialcashflow=-$66,000+(-$16,000)=-$82,000After-taxsalvagevalue=$40,000×0.66=$26,400Additionalcashflowatyear3formafter-taxsalvagevalueandnetworkingcapital=$26,400+$16,000=$42,400Second,calculateOCFthat

7、makeNPV=0OCFsarethesameforallthethreeyearsandsowecanusePVannuityformula.Third,calculatepricePwhichcanmakeOCF=$22,993OCF=(sales-cost)×(1-T)+depr.×T=(4P-4×88,000-18,000)×0.66+(66,000÷3)×0.34PlugOCF=22,993intothelefthandsideandsolveforP→P=98,376Roundedtothenearest$

8、500,thebidpriceis$98,500.6.1)Note:NWC=CA-CL,△NWC=△CA-△CL△CA=$160,000+$35,000;△CL=$100,000InvestmentinNWCforthisproject:△NWC=$160,000+$35,000-$100,000=$95,000Initialco