Posted: December 19th, 2022

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Complete the following problems from chapter 12 in the textbook:

P12-3

P12-4

P12-8

P12-12

P12-14

P12-18

Follow these instructions for completing and submitting your assignment:

Do all work in Excel. Do not submit Word files or *.pdf files.

Submit a single spreadsheet file for this assignment. Do not submit multiple files.

Place each problem on a separate spreadsheet tab.

Label all inputs and outputs and highlight your final answer.

Follow the directions in “Guidelines for Developing Spreadsheets.”

P12–3 Breakeven cash inflows and risk Blair Gasses and Chemicals is a supplier of highly

purified gases to semiconductor manufacturers. A large chip producer has asked Blair

to build a new gas production facility close to an existing semiconductor plant. Once

the new gas plant is in place, Blair will be the exclusive supplier for that semiconductor

fabrication plant for the subsequent 5 years. Blair is considering one of two plant

designs. The first is Blair’s “standard” plant, which will cost $30 million to build. The

second is for a “custom” plant, which will cost $40 million to build. The custom plant

will allow Blair to produce the highly specialized gases that are required for an emerging

semiconductor manufacturing process. Blair estimates that its client will order

$10 million of product per year if the traditional plant is constructed, but if the customized

design is put in place, Blair expects to sell $15 million worth of product annually

to its client. Blair has enough money to build either type of plant, and, in the absence

of risk differences, accepts the project with the highest NPV. The cost of capital is 12%.

a. Find the NPV for each project. Are the projects acceptable?

b. Find the breakeven cash inflow for each project.

c. The firm has estimated the probabilities of achieving various ranges of cash inflows for the two projects as shown in the following table. What is the probability that each project will achieve at least the breakeven cash inflow found in part b?

d. Which project is more risky? Which project has the potentially higher NPV? Discuss the risk–return trade-offs of the two projects.

e. If the firm wished to minimize losses (that is, NPV < $0), which project would you recommend? Which would you recommend if the goal were to achieve a higher NPV?

P12–4 Basic scenario analysis Murdock Paints is in the process of evaluating two mutually

exclusive additions to its processing capacity. The firm’s financial analysts have developed

pessimistic, most likely, and optimistic estimates of the annual cash inflows

associated with each project. These estimates are shown in the following table.

a. Determine the range of annual cash inflows for each of the two projects.

b. Assume that the firm’s cost of capital is 10% and that both projects have 20-year lives. Construct a table similar to this one for the NPVs for each project. Include the range of NPVs for each project.

c. Do parts a and b provide consistent views of the two projects? Explain.

d. Which project do you recommend? Why?

P12–8 Risk-adjusted discount rates: Basic Country Wallpapers is considering investing in

one of three mutually exclusive projects, E, F, and G. The firm’s cost of capital, r, is

15%, and the risk-free rate, Rғ, is 10%. The firm has gathered the basic cash flow

and risk index data for each project as shown in the following table.

a. Find the net present value (NPV) of each project using the firm’s cost of capital.

Which project is preferred in this situation?

b. The firm uses the following equation to determine the risk-adjusted discount

rate, RADRj, for each project j:

RADRј= Rғ + [Riј X (r – Rғ)]

where

Rғ = risk = free rate of return

RIj = risk index for project j

r = cost of capital

Substitute each project’s risk index into this equation to determine its RADR.

c. Use the RADR for each project to determine its risk-adjusted NPV. Which project

is preferable in this situation?

d. Compare and discuss your findings in parts a and c. Which project do you recommend

that the firm accept?

P12–12 Risk classes and RADR Moses Manufacturing is attempting to select the best of

three mutually exclusive projects, X, Y, and Z. Although all the projects have 5-year

lives, they possess differing degrees of risk. Project X is in class V, the highest-risk

class; project Y is in class II, the below-average-risk class; and project Z is in class

III, the average-risk class. The basic cash flow data for each project and the risk

classes and risk-adjusted discount rates (RADRs) used by the firm are shown in the

following tables.

a. Find the risk-adjusted NPV for each project.

b. Which project, if any, would you recommend that the firm undertake?

P12–14 Unequal lives: ANPV approach Portland Products is considering the purchase of

one of three mutually exclusive projects for increasing production efficiency. The

firm plans to use a 14% cost of capital to evaluate these equal-risk projects. The initial

investment and annual cash inflows over the life of each project are shown in the

following table.

a. Calculate the NPV for each project over its life. Rank the projects in descending

order on the basis of NPV.

b. Use the annualized net present value (ANPV) approach to evaluate and rank the

projects in descending order on the basis of ANPV.

c. Compare and contrast your findings in parts a and b. Which project would you

recommend that the firm purchase? Why?

P12–18 Capital rationing: IRR and NPV approaches Valley Corporation is attempting to select

the best of a group of independent projects competing for the firm’s fixed capital

budget of $4.5 million. The firm recognizes that any unused portion of this budget

will earn less than its 15% cost of capital, thereby resulting in a present value of inflows

that is less than the initial investment. The firm has summarized, in the following

table, the key data to be used in selecting the best group of projects.

a. Use the internal rate of return (IRR) approach to select the best group of projects.

P12–18 Capital rationing: IRR and NPV approaches Valley Corporation is attempting to select

the best of a group of independent projects competing for the firm’s fixed capital

budget of $4.5 million. The firm recognizes that any unused portion of this budget

will earn less than its 15% cost of capital, thereby resulting in a present value of inflows

that is less than the initial investment. The firm has summarized, in the following

table, the key data to be used in selecting the best group of projects.

a. Use the internal rate of return (IRR) approach to select the best group of projects.

b. Use the net present value (NPV) approach to select the best group of projects.

c. Compare, contrast, and discuss your findings in parts a and b.

d. Which projects should the firm implement? Why?

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