2 answers

Kaleb Konstruction, Inc., has the following mutually exclusive projects available. The company has historically used a...

Question:

Kaleb Konstruction, Inc., has the following mutually exclusive projects available. The company has historically used a three-

Kaleb Konstruction, Inc., has the following mutually exclusive projects available. The company has historically used a three-year cutoff for projects. The required return is 10 percent. Year Project F Project G o-NM $140,000 57,500 52,500 62,500 57,500 52,500 $210,000 37,500 52,500 92,500 122,500 137,500 a. Calculate the payback period for both projects. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) b. Calculate the NPV for both projects. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) c. Which project, if any, should the company accept? years years . Project F Project G Project F Project G

Answers

computation of Payback beriod! Project of - wm is Cash infbw 57500 S2500 62500 S7 SOO 52500 {Cashin How 57,500 1 19000 (17250Neu! Computation of Prot Cashin flow G F PUFQ10% $22675 34087.5 0.909 Year Cashin flow F G 5750 37500 2 $2.500 52.500 62,500period is more than 3 years compared to Project - Go Project-G has higher Npv. but Payback In case of Project -f wow is bewer

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Q No. 2 Assume that you are a new analyst hired to evaluate the capital budgeting projects of the company which is considering investing in two CPEC projects, “Expansion Zone North” and “Expansion Zone East”. The initial cost of each project is Rs. 10,000. Company discount all projects based on WACC.

Further, all the projects are equally risky projects and the company uses only debt and common equity for financing these projects. It can borrow unlimited amounts at an interest rate of rd 10% as long as it finances at its target capital structure, which calls for 50% debt and 50% common equity. The dividend for next period is $2.0, its expected that they will grow at the constant growth rate of 8%, and the company’s common stock sells for $20. The tax rate is 50%.

 

The cash flows of both the projects are given in table below:

 

Time

Expansion Zone North

Cashflows (amount in Rs.)

Expansion Zone East

Cashflows (amount in Rs.)

0

-            10,000

-            10,000

1

6,500

3,500

2

3,000

3,500

3

3,000

3,500

4

1,000

3,500

 

Carefully analyze the above table and answer the following questions in detail.

        I.            Calculate the weighted average cost of capital for this firm? (2.5 marks)

     II.            Compute each project’s IRR, NPV, payback, MIRR, and discounted payback. (2.5 Marks)

   III.            Which project(s) should be accepted if they are mutually exclusive? Explain (1.5 Marks)

Which project(s) should be accepted if they are independent? Explain (1.5 Marks)


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