Financial Management CLA 1

CLA 1 Comprehensive Learning Assessment – CLO 1, CLO 2, CLO 3, CLO 4, CLO 5, CLO

7

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

$1,250,0006

$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 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 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

Provide your explanations and definitions in detail and be precise. Comment on your findings.

Provide references for content when necessary. Provide your work in detail and explain in your own words.
Pdf or word format please!

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