Bài Tập Buổi 4 (Updated)

BÀI TẬP BUỔI 4 (UPDATED)
2-1 CALCULATING PRESENT VALUES Calculate the present value of each of the
following cash flow streams. Use a discount rate of 10%.
a. $500 received at the end of five years
b. $500 received annually for each of the next five years
c. $500 received annually for each of the next fifty years
d. $500 received annually for 100 years
2-2 CALCULATING THE INTERNAL RATE OF RETURN Singular Construction is
evaluating whether to build a new distribution facility. The proposed investment will cost
Singular $4 million to construct and provide cash savings of $500,000 per year over the next
ten years.
a. What rate of return does the investment offer?
b. If Singular were to invest another $200,000 in the facility at the end of five years, it would
extend the life of the project by four years, during which time it would continue receiving cash
savings of $500,000. What is the internal rate of return for this investment?
2-3 CALCULATING PROJECT FCF In the spring of 2015, Jemison Electric was considering
an investment in a new distribution center. Jemison’s CFO anticipates additional earnings before
interest and taxes (EBIT) of $100,000 for the first year of operation of the center, and, over the
next five years, the firm estimates that this amount will grow at a rate of 5% per year. The
distribution center will require an initial investment of $400,000 that will be depreciated over a
five-year period toward a zero salvage value using straight-line depreciation of $80,000 per year.
Jemison’s CFO estimates that the distribution center will need operating net working capital
equal to 20% of EBIT to support operation. Assuming the firm faces a 30% tax rate, calculate the
project’s annual project free cash flows (FCFs) for each of the next five years where the salvage
value of operating networking capital and fixed assets is assumed to equal their book values,
respectively.
2-4 PRO FORMA FINANCIAL STATEMENTS In the JC Crawford example, capital
expenditures (CAPEX) are estimated using projected balances for net property, plant, and
equipment (net PPE), which is determined by the firm’s projected sales. In 2016, the estimated
ending balance for net PPE is projected to be $440,000, which represents an increase of $40,000
over the ending balance for 2015. However, CAPEX for 2016 is estimated to be $80,000. Why
is the change in net PPE not equal to CAPEX? (Hint: Consider the effect of annual depreciation
expense on net PPE.)
2-6 COMPREHENSIVE PROJECT FCF The TCM Petroleum Corporation is an integrated oil
company headquartered in Fort Worth, Texas. Historical income statements for 2014 and 2015 are found
below (dollar figures are in the millions):
In 2014, TCM made capital expenditures of $875 million, followed by $1,322 million in 2015. TCM also
invested an additional $102 million in net working capital in 2014, followed by a decrease in its
investment in net working capital of $430 million in 2015.
a. Calculate TCM’s FCFs for 2014 and 2015. TCM’s tax rate is 40%.
b. Estimate TCM’s FCFs for 2016 to 2020 using the following assumptions: Operating income continues
to grow at 10% per year over the next five years, CAPEX is expected to be $1,000 million per year, new
investments in net working capital are expected to be $100 million per year, and depreciation expense
equals the prior year’s total plus 10% of the prior year’s CAPEX. Note that because TCM is a going
concern, we need not be concerned about the liquidation value of the firm’s assets at the end of 2020.
2-9 INTRODUCTORY PROJECT VALUATION The CT Computers Corporation is

considering whether to begin offering customers the option to have their old personal computers
(PCs) recycled when they purchase new systems. The recycling system would require CT
Computers to invest $600,000 in the grinders and magnets used in the recycling process. The
company estimates that for each system it recycles, it would generate $1.50 in incremental
revenues from the sale of scrap metal and plastics. The machinery has a five-year useful life and
will be depreciated using straight-line depreciation toward a zero salvage value. CT Computers
estimates that in the first year of the recycling investment, it could recycle 100,000 PCs and that
this number will grow by 25% per year over the remaining four-year life of the recycling
equipment. CT Computers uses a 15% discount rate to analyze capital expenditures and pays
taxes equal to 30%.
a. What are the project cash flows? You can assume that the recycled PCs cost CT Computers
nothing.
b. Calculate the NPV and IRR for the recycling investment opportunity. Is the investment a good
one based on these cash flow estimates?
c. Is the investment still a good one if only 75,000 units are recycled in the first year?
d. Redo your analysis for a scenario in which CT Computers incurs a cost of $0.20 per unit to
dispose of the toxic elements from the recycled computers. What is your recommendation under
these circumstances?
2-7 INTRODUCTORY PROJECT VALUATION Steve’s Sub Stop (Steve’s) is considering
investing in toaster ovens for each of its 120 stores located in the southwestern United States.
The high-capacity conveyor toaster ovens, manufactured by Lincoln, will require an initial
investment of $15,000 per store plus $500 in installation costs, for a total investment of
$1,860,000. The new capital (including the costs for installation) will be depreciated over five
years using straight-line depreciation toward a zero salvage value. Steve’s will also incur
additional maintenance expenses totaling $120,000 per year to maintain the ovens. At present,
firm revenues for the 120 stores total $9 million, and the company estimates that adding the
toaster feature will increase revenues by 10%.
a. If Steve’s faces a 30% tax rate, what expected project FCFs for each of the next five years will
result from the investment in toaster ovens?
b. If Steve’s uses a 9% discount rate to analyze its investments in its stores, what is the project’s
NPV? Should the project be accepted?
2-11 PROJECT VALUATION HMG Corporation is considering the manufacture of a new
chemical compound that is used to make high-pressure plastic containers. An investment of $4
million in plant and equipment is required. The firm estimates that the investment will have a
five-year life, and will use straight-line depreciation toward a zero salvage value. However, the
investment has an anticipated salvage value equal to 10% of its original cost. The number of
pounds (in millions) of the chemical compound that HMG expects to sell over the five-year life
of the project are as follows: 1.0, 1.5, 3.0, 3.5, and 2.0. To operate the new plant, HMG estimates
that it will incur additional fixed cash operating expenses of $1 million per year and variable
operating expenses equal to 45% of revenues. HMG also estimates that in year t it will need to
invest 10% of the anticipated increase in revenues for year t + 1 in net working capital. The price
per pound for the new compound is expected to be $2.00 in years 1 and 2, then $2.50 per pound
in years 3 through 5. HMG’s tax rate is 38%, and it requires a 15% rate of return on its new-
product investments.
a. Exhibit P2-11.1 contains projected cash flows for the entire life of the proposed investment.
Note that investment cash flow is derived from the additional revenues and costs associated with
the proposed investment. Verify the calculation of project cash flow for year 5.
b. Does this project create shareholder value? How much? Should HMG undertake the
investment? Explain your answer.
c. What if the estimate of the variable costs were to rise to 55%? Would this affect your
decision?

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2-9 INTRODUCTORY PROJECT VALUATION The CT Computers Corporation is

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