Managerial Finance- Capital Budgeting
Question Description
Please include all work related to the questions and any notes to help me walk through the assignment. Show work please!
FOUR capital budgeting questions. More information on the question in the attachment.
Question 1 – Financial Planning
You are considering going to graduate school to get your Ph.D. You anticipate that your studies will take five years to complete, that you will receive a full tuition waiver, but that you will incur living expenses of $35,000 a year while in grad school. As part of your studies you will also work as a research assistant for which you will be paid $25,000 a year. The annual interest rate on your savings account is 3.5%. Assume that there are no taxes and that you do not want to apply for a student loan. How much will you need to invest in your savings account today in order to afford graduate school? Present your results in a table similar to the one below.
Question 2 – Annuities and Perpetuities
You have decided to donate $250,000 to your degree granting university in order to fund a new scholarship program. You expect that the university can earn 8% per year on its investments.
A) Assume that you would like the scholarship program to run for 10 years and that you would like it to make the same dollar payment each year. What is the maximum amount that the scholarship can pay out each year? (Please show your work.)
B) Assume that you would like the scholarship program to run indefinitely and that you would like it to make the same dollar payment each year. What is the maximum amount that the scholarship can pay out each year? (Please show your work.)
Question 3 – Investment Decision
Calculate the NPV for each project and present your results in table similar to the one below
Assume that you only have $100,000 to invest and that you can not raise more capital. However, you have no labor hour constraints (you have enough workers to meet all labor hour requirements). Which project or combination of projects would you invest in?
C) Assume that you are not cash constrained, but that you cannot hire additional workers. With your current workforce the maximum number of labor hours you can allocate across projects each year is 150. Which project or combination of projects would you invest in?
Question 4 – Expanding Production
Suppose you are considering the purchase of new equipment in order to meet increased demand for your product. The equipment costs $320,000 today and has a useful life of eight years. You will depreciate the equipment by $40,000 each year over eight years, starting at the end of the first year. You expect that the equipment can be sold for $60,000 at the end of year eight. With the new equipment you expect an increase of revenues by $120,000 and of costs of goods sold (COGS) by $40,000 for each year over the next eight years. The net working capital requirements for this project will be 5% of the incremental revenues of this project. The marginal tax rate is 21%, and that the applicable interest rate is 10%.
A) Calculate the liquidation value of the equipment after tax in year eight.
B) Calculate the net working capital requirements for the project as well as the annual change in net working capital. Present your results in a table similar to the one below.