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Financial Management [24]

deals with free cash flows that help you to measure the true timing of the benefits rather than accounting profits.
QUESTION 4
According to the profitability index (PI) formula: PI = PV / IO
Where according to the PV calculated above, thus, PV = \$106,289.3
Initial outlay (IO) = 85,000
Therefore, PI = 106,289.3 / 85,000 = 1.2505
[ Arthur J. Keown; John D. Martin; J. William Petty; David F. Scott. JR, 2005, Financial Management, 10th Edition, P298
]The profitability index (PI) is the ratio of the present value of the future free cash flows to the initial outlay; and the decision criterion is that we accept the project if the PI is greater than or equal to 1.00; on the contrary, we reject the project if the PI is less than 1.00.
QUESTION 5
The NPV, IRR and PI all lead to the same accept/reject decision when evaluating a single project or an independent project with conventional cash flow. On the other hand, those methods may conflict when ranking mutually exclusive projects and there are three major possible factors for these conflicts: initial investment size or scale; cash flow patterns and life spans (unequal lives).
Once the conflicts happen, the NPV method should be used to make the final decisions since the NPV method has the ability to correctly rank mutually exclusive investment projects with differences in size and timing of cash flows that will maximize the value of the firm.
QUESTION 6
If SRC have a fixed overhead cost of \$1.5 million per annum, this amount should be incorporated in annual incremental cash flows for the project evaluation, since the fixed overhead cost of \$1.5 million per annum is treated as a cash flow in a capital budgeting problem. Thus, the fixed overhead of \$1.5million should be allocated in incremental cash flows for project evaluation.
QUESTION 7
a)
Initial outlay (Year 0) \$
Replacement machine 80,000
Equipment installation 5,000
After tax sales (Salvage value – book value) * tax (5,000 – 7,000) * 40% 800
Net initial outlay (Year 0) 85,800
Thus, the cash flows in Year 0 would be \$85,800.

b)
Initial outlay (Year 0) \$
Replacement machine 80,000
Equipment installation 5,000
After tax sales (Salvage value – book value) * tax (10,000 – 7,000) * 40% (1,200)
Net initial outlay (Year 0) 83,800
Thus, the cash flows in Year 0 would be \$83,800.

QUESTION 8
Cheap system: Initial outlay (IO) = \$55,000, cost of capital = 10%
Net Present Value (NPV) = PV – IO
= 28,000/1.1 + 20,000/1.12 + 10,000/1.13 + 5,500/1.14 + 4,500/1.15 – 55,000
= \$1,047.34

Expensive system: Initial outlay (IO) = \$95,000, cost of capital = 10%
According to the NPV formula: Net Present Value (NPV) = PV – IO
= 40,000/1.1 + 20,000/1.12 + 20,000/1.13 + 10,000/1.14 + 10,000/1.15 + 10,000/1.16 + 10,000/1.17 + 10,000/1.18 – 95,000
= \$1,399.6
According to the NPC that calculated above, is not enough for us to make a decision based on one criterion, there are several criteria that we need to refer to. For example, internal rate of return, payback period, require rate of return and so on, we need to look after these criteria as long as is sufficient for us to analysis which one should be chosen. The system which with higher internal rate of return; s论文英语论文网提供整理，提供论文代写英语论文代写代写论文代写英语论文代写留学生论文代写英文论文留学生论文代写相关核心关键词搜索。

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