05 Dec CLA 1 Comprehensive Learning Assessment – CLO 1, CLO 2, CLO 3, CLO 4, CLO 5
CLA 1 Comprehensive Learning Assessment – CLO 1, CLO 2, CLO 3, CLO 4, CLO 5
Please note this CLA 1 assignment consists of two separate parts. The first part gives the cash flows for two mutually exclusive projects and is not related to the second part. The second part is a capital budgeting scenario.
Part 1
Please calculate the payback period, IRR, MIRR, NPV, and PI for the following two mutually exclusive projects. The required rate of return is 15% and the target payback is 4 years. Explain which project is preferable under each of the four capital budgeting methods mentioned above:
Table 1
Cash flows for two mutually exclusive projects
|
Year |
Investment A |
Investment B |
|
0 |
-$5,000,000 |
-5,000,000 |
|
1 |
$1,500,000 |
$1,250,000 |
|
2 |
$1,500,000 |
$1,250,000 |
|
3 |
$1,500,000 |
$1,250,000 |
|
4 |
$1,500,000 |
$1,250,000 |
|
5 |
$1,500,000 |
$1,250,000 |
|
6 |
$1,500,000 |
$1,250,000 |
|
7 |
$2,000,000 |
$1,250,000 |
|
8 |
0 |
$1,600,000 |
Part 2
Please study the following capital budgeting project and then provide explanations for the questions outlined below:
You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ), manufacturers of fine zithers. The market for zithers is growing quickly. The company bought some land three years ago for $2.1 million in anticipation of using it as a toxic waste dump site but has recently hired another company to handle all toxic materials. Based on a recent appraisal, the company believes it could sell the land for $2.3 million on an after-tax basis. In four years, the land could be sold for $2.4 million after taxes. The company also hired a marketing firm to analyze the zither market, at a cost of $125,000. An excerpt of the marketing report is as follows:
The zither industry will have a rapid expansion in the next four years. With the brand name recognition that PUTZ brings to bear, we feel that the company will be able to sell 3,600, 4,300, 5,200, and 3,900 units each year for the next four years, respectively. Again, capitalizing on the name recognition of PUTZ, we feel that a premium price of $750 can be charged for each zither. Because zithers appear to be a fad, we feel at the end of the fou
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