Business Question

1 Unit-4 Assignment Mit Dani Purdue University Global GB550-01 Financial Management Sinan Yildirim 04/30/24 2 Evaluating Investment Projects Question One The estimated cost of common equity using CAPM can be obtained as follows: πΆπ‘œπ‘ π‘‘ π‘œπ‘“ π‘’π‘žπ‘’π‘–π‘‘π‘¦ = π‘…π‘–π‘ π‘˜π‘“π‘Ÿπ‘’π‘’ π‘Ÿπ‘Žπ‘‘π‘’ π‘œπ‘“ π‘Ÿπ‘’π‘‘π‘’π‘Ÿπ‘› − π΅π‘’π‘‘π‘Ž × (π‘€π‘Žπ‘Ÿπ‘˜π‘’π‘‘ π‘…π‘’π‘‘π‘’π‘Ÿπ‘› − π‘…π‘–π‘ π‘˜π‘“π‘Ÿπ‘’π‘’ π‘…π‘Žπ‘‘π‘’ π‘œπ‘“ π‘…π‘’π‘‘π‘’π‘Ÿπ‘› 𝐢 = 4% + 0.08(15% − 3%)=4.96% Question Two 12% 0 1 2 3 4 5 6 7 8 8 $ (60,000.00) $ 10,000.00 $ 10,000.00 $ 10,000.00 $ 10,000.00 $ 10,000.00 $ 10,000.00 $ 10,000.00 $ 10,000.00 IRR NPV $ (10,323.60) PV $49676.40 a. Finding NPV Initial investment: $60,000 6.876% 3 Cash flow per year: $10,000 Number of years: 8 Discount rate : 12%. NPV calculation using Excel: 𝑁𝑃𝑉 = 10000 10000 10000 10000 10000 10000 10000 10000 + + + + + + + − 60000 1.12 1.122 1.123 1.124 1.125 1.126 1.127 1.128 = −$10,323.60 b. Finding IRR Calculating IRR on Excel: I𝑅𝑅 = 𝐼𝑅𝑅(𝐡3: 𝐡11) = 6.88% c. Finding MIRR Finding MIRR on Excel: = 𝑀𝐼𝑅𝑅(𝐡3: 𝐡11, 𝐡1, 𝐡12) = 6.88% d. Project’s PI Profitability index of the project is given by: 𝑃𝑉 π‘œπ‘“ πΉπ‘’π‘‘π‘’π‘Ÿπ‘’ πΆπ‘Žπ‘ β„Ž πΉπ‘™π‘œπ‘€π‘  ; πΌπ‘›π‘–π‘‘π‘–π‘Žπ‘™ πΌπ‘›π‘£π‘’π‘ π‘‘π‘šπ‘’π‘›π‘‘π‘  == 𝑃𝑉(𝐴1, 𝐡1, 𝐡11,0,0) $49676.40 = = 0.83 60,000 60000 e. Project’s payback period πΌπ‘›π‘–π‘‘π‘–π‘Žπ‘™ π‘–π‘›π‘£π‘’π‘ π‘‘π‘šπ‘’π‘›π‘‘ $60,000 π‘ƒπ‘Žπ‘¦π‘π‘Žπ‘π‘˜ π‘π‘’π‘Ÿπ‘–π‘œπ‘‘ = Annual Cash flow = $10,000 = 6 π‘¦π‘’π‘Žπ‘Ÿπ‘  4 f. Project’s discounted payback period π‘ˆπ‘›π‘Ÿπ‘’π‘π‘œπ‘£π‘’π‘Ÿπ‘’π‘‘ π‘Žπ‘šπ‘œπ‘’π‘›π‘‘ 0 π·π‘–π‘ π‘π‘œπ‘’π‘›π‘‘π‘’π‘‘ π‘ƒπ‘Žπ‘¦π‘π‘Žπ‘π‘˜ π‘π‘’π‘Ÿπ‘–π‘œπ‘‘ = π‘Œπ‘’π‘Žπ‘Ÿπ‘  𝑒𝑛𝑑𝑖𝑙 π΅π‘Ÿπ‘’π‘Žπ‘˜ 𝑒𝑣𝑒𝑛 + π‘…π‘’π‘π‘œπ‘£π‘’π‘Ÿπ‘¦ π‘Œπ‘’π‘Žπ‘Ÿ πΆπ‘Žπ‘ β„Ž πΉπ‘™π‘œπ‘€ = 6 + 6 = 6 π‘¦π‘’π‘Žπ‘Ÿπ‘  Question Three Part (a) Initial Investment = -$20,000,000 Cash Flows: Year 1: $5,000,000 Year 2: $10,000,000 Year 3: $20,000,000 For Project B: Initial Investment = -$20,000,000 Cash Flows: Year 1: $20,000,000 Year 2: $10,000,000 Year 3: $6,000,000 5 NPV when Cost of capital is 5% Project A: 5000000 10000000 20000000 + + − 20,000,000 = $31,108,951.52 − 20,000,000 1.051 1.052 1.053 𝑁𝑃𝑉𝐴 = = $11,108,951.52 Project B 𝑁𝑃𝑉𝐡 = 20000000 10000000 6000000 + + − 20000000 = $13,300,939.42 1.051 1.052 1.053 NPV when Cost of capital is 10% Project A: 𝑁𝑃𝑉𝐴 = 𝑁𝑃𝑉𝐡 = 5000000 1.11 + 10000000 1.12 + 20000000 1.13 − 20,000,000 = $7836213.37 20000000 10000000 6000000 + + − 20000000 = $10954169.80 1.11 1.12 1.13 NPV when Cost of capital is 15% Project B: 𝑁𝑃𝑉𝐴 = 𝑁𝑃𝑉𝐡 = 5000000 1.151 + 10000000 1.152 + 20000000 1.153 − 20,000,000 = $5,059,587.41 20000000 10000000 6000000 + + − 20000000 = $8,897,838.42 1.151 1.152 1.153 Part (b) IRR for Project A =IRR(B3:B6); IRR for Project B =IRR(E3:E6) Year 0 1 2 3 Project A CF $ (20,000,000.00) $ 5,000,000.00 $ 10,000,000.00 $ 20,000,000.00 Year 0 1 2 3 Project B CF $ (20,000,000.00) $ 20,000,000.00 $ 10,000,000.00 $ 6,000,000.00 6 IRR 26.73% IRR Therefore, 𝐼𝑅𝑅𝐴 = 26.73% π‘Žπ‘›π‘‘ 𝐼𝑅𝑅𝐡 = 47.63% 47.63%

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