Finance: Free Cash Flow

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• Published : March 31, 2013

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inance COOPERATE FINANCE|
Miss Afifa|
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Assignment# 4|
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UMAIR ASIF11 March 2013|

You submitted this Assignment on Sun 10 Mar 2013 7:21 PM PDT. You got a score of 85.00 out of 100.00. You can attempt again, if you'd like. Top of Form
Please read all questions and instructions carefully. Note that you only need to enter answers in terms of numbers and without any symbols (including \$, %, commas, etc.). Enter all dollars without decimals and all interest rates in percentage with up to two decimals. Read the syllabus for examples.The points for each question are listed in parentheses at the start of the question, and the total points for the entire assignment adds up to 100. You are strongly encouraged to use spreadsheets. Refer to Note on Sample Cash Flow Template. Question 1

(5 points) The project with the highest IRR is always the project with the highest NPV. Your Answer| | Score| Explanation|
True| | | |
False| ✔| 5.00| Correct. Try now to sort this out in different contexts,| Total| | 5.00 / 5.00| |
Question Explanation

This is all about the fundamental difference between IRR and NPV. Question 2
(10 points) Ann Arbor is considering offering public bus service for free. Setting up the service will cost the city \$0.6M (where M stands for million). The useful life of the buses is 25 years. Annual maintenance of the buses would cost \$50,000 per year and they would need a major overhaul in year 15 that will cost a total of \$350,000. This overhaul is in addition to the annual maintenance. Annual operating costs will begin at \$90,000 in year 1 and grow at 2% per year thereafter. By using the buses as advertisement space, the city will generate a revenue of \$75,000 in year 1 and it will grow at 4% per year thereafter. Reduced parking requirements and other benefits generated by the project will save the city \$100,000/year. The salvage value (price city can get in the future after maintenance) of the used buses in year 25 is expected to be \$150,000. What is the NPV of the bus proposal? Ann Arbor does not pay taxes and the discount rate is 5%.(Again, all cash flows except initial investments happen at the end of the year.) (You are strongly encouraged to use a spreadsheet.) Your Answer| | Score| Explanation|

-10223| | | |
29847| ✔| 10.00| Correct. You apparently have thought through issues.| 31222| | | |
19323| | | |
Total| | 10.00 / 10.00| |
Question Explanation

A real world problem with some simplifications in cash flows. Question 3
(5 points) Alpha Inc. has the following two projects that it is considering, and it wants to choose one. Project A has an investment outlay/expense today of \$1,000, and its cash flows over the next three years are \$500, \$600, \$700. Project B has an outlay of \$2,000, and cash flows of \$1,000, \$1,200, and \$1,400. Which project should Alpha choose? (You can assume no taxes.) Your Answer| | Score| Explanation|

Project A| | | |
Does not matter; both are essentially the same| | | |
Cannot make a choice based on information| ✔| 5.00| Correct. What information is missing?| Project B| | | |
Total| | 5.00 / 5.00| |
Question Explanation

This question is probing your comfort level and understanding of decision making; and the most common pitfall we confront all the time. Question 4
(10 points) Mango Technology has the following three projects that it is considering; it can choose only one. Project A has an investment outlay/expense today of \$100M, and its cash flows over the next three years are \$20M, \$40M, \$70M. Project B has an outlay of \$110M, and cash flows of \$40M, \$80M, \$20M; Project C has an outlay of \$120M and cash flows of \$0M, \$20M, and \$142M. Which project should the company choose if the cost of capital for similar projects is 6%? Your Answer| | Score| Explanation|

Project B| | | |
Project C| | | |
Do not have enough information| ✘| 0.00| You do have...