Weston Systems is considering the following independent projects for the coming year: Project Required Investment Expected Rate of Return Risk X $8 million 12.5% High Y 8 million 9.5% Average Z 3 million 5.5% Low Weston’s WACC is 9 percent, but it adjusts for risk by adding 2 percent to the WACC for high-risk projects and subtracting 2 percent for low-risk projects. What would be the minimum acceptable return for each of the three projects? Which project(s) should Weston accept assuming it faces no capital constraints?
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Weston Systems is considering the following independent projects for the coming year:
Project |
Required Investment |
Expected |
Risk |
X |
$8 million |
12.5% |
High |
Y |
8 million |
9.5% |
Average |
Z |
3 million |
5.5% |
Low |
Weston’s WACC is 9 percent, but it adjusts for risk by adding 2 percent to the WACC for high-risk projects and subtracting 2 percent for low-risk projects.
- What would be the minimum acceptable return for each of the three projects?
- Which project(s) should Weston accept assuming it faces no capital constraints?
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- Project S has a cost of $10,000 and is expected to produce benefits (cash flows) of $3,000 per year for 5 years. Project L costs $25,000 and is expected to produce cash flows of $7,400 per year for 5 years. Calculate the two projects’ NPVs, IRRs, MIRRs, and PIs, assuming a cost of capital of 12%. Which project would be selected, assuming they are mutually exclusive, using each ranking method? Which should actually be selected?Ziege Systems is considering the following independent projects for the coming year: Project RequiredInvestment Rate ofReturn Risk A $4 million 14.75% High B 5 million 12.25 High C 3 million 10.25 Low D 2 million 9.5 Average E 6 million 13.25 High F 5 million 13.25 Average G 6 million 7.5 Low H 3 million 11.75 Low Ziege's WACC is 10.75%, but it adjusts for risk by adding 2% to the WACC for high-risk projects and subtracting 2% for low-risk projects. Which projects should Ziege accept if it faces no capital constraints? Project A -Select-AcceptRejectItem 1 Project B -Select-AcceptRejectItem 2 Project C -Select-AcceptRejectItem 3 Project D -Select-AcceptRejectItem 4 Project E -Select-AcceptRejectItem 5 Project F -Select-AcceptRejectItem 6 Project G -Select-AcceptRejectItem 7 Project H -Select-AcceptRejectItem 8 If Ziege can only invest a total of $13 million, which projects should it accept? Project A -Select-AcceptRejectItem 9 Project B…Ziege Systems is considering the following independent projects for the coming year: Project A Required Investment Rate of Return Risk $4 million 13.25% High BCDEFGH 5 million 10.75 High 3 million 8.75 Low 2 million 8.50 Average 6 million 11.75 5 million 11.75 High Average 6 million 6.50 Н 3 million 10.50 Low Low If Ziege can only invest a total of $13 million, what would be the dollar size of its capital budget? Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answer to two decimal places. $ million c. Suppose Ziege can raise additional funds beyond the $13 million, but each new increment (or partial increment) of $5 million of new capital will cause the WACC to increase by 1%. Assuming that Ziege uses the same method of risk adjustment, which projects should it now accept? Project A -Select- ✰ -Select- ◇ -Select- -Select- ✰ Project B Project C Project D Project E -Select- ✰ Project F -Select- ◊ Project G -Select- ◊ -Select- ✰…
- Ziege Systems is considering the following independent projects for the coming year: Project RequiredInvestment Rate ofReturn Risk A $4 million 13.25% High B 5 million 10.75 High C 3 million 8.75 Low D 2 million 8.50 Average E 6 million 11.75 High F 5 million 11.75 Average G 6 million 6.50 Low H 3 million 10.50 Low Ziege's WACC is 9.25%, but it adjusts for risk by adding 2% to the WACC for high-risk projects and subtracting 2% for low-risk projects. Which projects should Ziege accept if it faces no capital constraints? Project A accept or reject Project B accept or reject Project C accept or reject Project D accept or reject Project E accept or reject Project F accept or reject Project G accept or reject Project H accept or reject If Ziege can only invest a total of $13 million, which projects should it accept? Project A accept or reject Project B accept or reject Project C accept or reject Project D accept or reject Project E…Find the modified internal rate of return (MIRR) for a proposed project costing $12,513. Assume that the appropriate cost of capital for projects of this risk level, at this company is 10.96%, and the estimated cash flows for the life of the project are found in the table below. (If you calculate an MIRR of 20.22% , please enter 20.22- do not include the % symbol, and use at least two decimal places). Year 1 $7,261 Year 2 $4,832 Year 3 $9,441.2 Year 4 $13,000 Year 5 $12,638The Bartram-Pulley Company (BPC) must decide between two mutually exclusive investment projects. Each project costs $7,750 and has an expected life of 3 years. Annual net cash flows from each project begin 1 year after the initial investment is made and have the following probability distributions: Project B Project A Cash Flows Project A: $ Yes $ σ $ Project A Project B $ b. What is the risk-adjusted NPV of each project? Do not round intermediate calculations. Round your answers to the nearest cent. x X * $ CV BPC has decided to evaluate the riskier project at an 11% rate and the less risky project at a 10% rate. a. What is the expected value of the annual cash flows from each project? Do not round intermediate calculations. Round your answers to the nearest dollar. Project A Project B X Net cash flow $ What is the coefficient of variation (CV)? (Hint: OB-$4,757.63 and CVB=$0.67.) Do not round intermediate calculations. Round a values to the nearest cent and CV values to two decimal…
- 8. Modified Internal rate of return (MIRR) The IRR evaluation method assumes that cash flows from the project are reinvested at the same rate equal to the IRR. However, in reality the reinvested cash flows may not necessarily generate a return equal to the IRR. Thus, the modified IRR approach makes a more reasonable assumption other than the project's IRR. Consider the following situation: Green Caterpillar Garden Supplies Inc. is analyzing a project that requires an initial investment of $400,000. The project's expected cash flows are: Year Year 1 Year 2 Year 3 Year 4 Cash Flow $325,000 -200,000 425,000 475,000es Lopez Company is considering three alternative investment projects below: Project 1 5.2 years $ 26,700 Project 2 5.7 Years $ 33,700 14.2% 13.1% Payback period Net present value Internal rate of return a. Payback period b. Net present value c. Internal rate of return. Which project is preferred if management makes its decision based on (a) payback period, (b) net present value, and (c) internal rate of return? Preferred Investment Project 3 4.9 Years Reason $19,700 12.5%Assume that you are considering several 5-year projects that have varying risk levels. You normally adjust your required return upward by 2% for higher-than-average risk projects and down by 2% for lower-than-average risk projects. The required return for average risk projects is 12%. After evaluating the risk of the projects under consideration, you have the following information: Project A B C Initial Investment ($50,000) ($50,000) ($50,000) Cash flows for years 1–5 14,000 14,750 13,500 Risk Level Average Above Average Below Average Calculate the payback period, IRR, NPV, MIRR and PI for each project using risk-adjusted discount rates. If the projects are independent, which would you accept? If they are mutually exclusive, which would you accept? Draw NPV profile for Project A…
- Bloombish Corp. Inc. is considering a project that has cash flows of -$152,000, $60,800, $61,300, and $75,000 for Years 0 to 3 respectively. The required rate of return is 14 percent. Based on the internal rate of return ________ percent, you should ___________ the project. Select one: A. 12.95 percent; accept B. 14.67 percent; accept C. 13.67 percent; reject D. 14.67 percent; rejectA company estimates that its average-risk projects have a WACC of 10%, its below-average risk projects have a WACC of 8%, and its above-average risk projects have a WACC of 12%. Which of the following projects (A, B, and C) should the company accept? A) Project C, which is of above-average risk and has a return of 11%. B) All of the projects should be accepted. C)Project A, which is of average risk and has a return of 9%. D)None of the projects should be accepted. E)Project B, which is of below-average risk and has a return of 8.5%.Lopez Company is considering three alternative Investment projects below: Project 2 4.8 Years Project 1 4.3 years $ 25,800 13.3% Payback period Net present value. Internal rate of return a. Payback period b. Net present value c. Internal rate of return $ 32,800 Preferred Investment 12.2% Project 3 4.0 Years Which project is preferred if management makes its decision based on (a) payback period, (b) net present value, and (c) Internal rate of return? Reason $ 18,800 11.6%