Questions – Financial Management:
Provide your work in detail and explain in “your own words”. Make sure to provide examples for each
of the questions below.
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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
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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 four-year period, sales should be
discontinued. PUTZ believes that fixed costs for the project will be $415,000 per year, and
variable costs are 15 percent of sales. The equipment necessary for production will cost $3.5
million and will be depreciated according to a three-year MACRS schedule. At the end of the
project, the equipment can be scrapped for $350,000. Net working capital of $125,000 will be
required immediately. PUTZ has a 38% tax rate, and the required rate of return on the project is
13%.
Now please provide a detailed explanation for the following:
● Explain how you determine the initial cash flows
● Discuss the notion of sunk costs and identify the sunk cost in this project
● Verify how you determine the annual operating cash flows
● Explain how you determine the terminal cash flows at the end of the project’s life
● Calculate the NPV and IRR of the project and decide if the project is acceptable
● If the company that is implementing this project is a publicly traded company, explain and
justify how this project will impact the market price of the company’s stock
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Instructions:
-Word document
-Font: Times New Roman
-At least 6 peer-reviewed sources (include DOI in reference page). You can utilize peer-reviewed sources for definitions.
-In-text citations for each peer-reviewed source.
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