Assignment: Entrepreneurial Finance
Due date:
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Note: Individual attempt would be honored. Copy-pasted would carry Zero Marks.

1. The TecOne Corporation is about to begin producing and selling its prototype product. Annual cash flows for the next five years are forecasted as:

A. Assume annual cash flows are expected to remain at the $800,000 level after Year 5 (i.e., Year 6 and thereafter). If TecOne investors want a 40 percent rate of return on their investment, calculate the venture’s present value.

B. Now assume that the Year 6 cash flows are forecasted to be $900,000 in the stepping stone year and are expected to grow at an 8 percent compound annual rate thereafter. Assuming that the investors still want a 40 percent rate of return on their investment, calculate the venture’s present value.

C. Now extend Part B one step further. Assume that the required rate of return on the investment will drop from 40 percent to 20 percent beginning in Year 6 to reflect a drop in operating or business risk. Calculate the venture’s present value.

2.Assume the forecasted cash flows presented in Problem 1 for the TecOne Corporation venture also hold for the LowTec venture. However, investors in LowTec have an expected rate of return of 30 percent on their investment until Year 6 when the rate of return is expected to drop to 18 percent. The perpetuity growth rate for cash flows after Year 6 is expected to be 7 percent.

A. Determine the present value for the LowTec venture.

B. If an outside investor offers to invest $1,500,000 dollars today, what percentage ownership in LowTec should be given to the new investor?

3. Ben Toucan, owner of the Aspen BrewPub and Restaurant, wants to determine the present value of his investment. The Aspen...

...(qualitatively) to value AirThread. Should Ms. Zhang use WACC, APV or some combination thereof? Explain. (2 points)
* From the statement of AirThread case, we know that American Cable Communication want to raise capital by Leveraged Buyout (LBO) approach. This means ACC will finance money though equity and debt to buy AirThread and pay the debt by the cash flows or assets of AirThread.
* In another word, it’s a highly levered transaction using a fixed WACC discount rate; however the leverage is changing in fact.
* If we want to use WACC method, one assumption must be met: this program will not change the debt-equity ratio of AirThread. Under LBO approach, it’s impossible.
* So we decide to use APV method to value AirThread. WACC method is not appropriate here, but we still need to calculate the weight average cost of capital (WACC) of AirThread.
Approach to value AirThread before considering any synergy
1. Develop a projection of unlevered free cash flow for AirThread.
* Discount AirThread’s unlevered free cash flows at unlevered WACC.
2. Determine the PV of interest tax shield:
* Discount AirThread’s interest tax shield by debt cost of capital (interest rate of debt).
3. Add the unlevered value to the PV of interest tax shield to get the value of the acquisition.
4. Using Dividend Discount Model (Gordon Growth Model) to estimate the terminal value.
5....

...Alternative A: initial cost $100, annual benefits $60, useful life 7 years
b) Alternative B: initial cost $60, annual benefits $20, useful life 7 years
Which alternative is preferable if i = 12%?
a) PV = $173.84
b) PV = $31.28
Select option a
7. Project A and B have first costs of $10,000 and $18,000, respectively. Project A has net annual benefits of $5,000 during each year of its 5 year useful life, after which it can be replaced identically.
Project B has annual benefits of $6600 during each year of its 10 year life. Use present worth analysis, an interest rate of 30% per year and a 10 year analysis period to determine which project to select.
Project A PV = $2767
Project B PV = $2407.20
Select project A
8. The lining of a chemical tank in a certain manufacturing operation is replaced every 5 years at a cost of $7,500. A new type lining is now available which would last 10 years but costs $19,500. The tank needs new lining now and you intend to use the tank for 40 years, replacing linings when necessary. Whit i of 10% compute the present worth of costs of 40 years of service for the 5-year and 10-year linings.
5 year lining PV of costs = $19,347.75
10 year lining PV of costs = $31,025.34
Select 5 year lining
9. A $25,000 20-year loan with a nominal interest rate of 12% compounded monthly is to be repaid in a uniform series of payments of $275...

...Examples Of NetPresentValue (NPV), ROI and
Payback Analysis
Introduction
Terms and Definitions
NetPresentValue - Method of calculating the expected net monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time.
Discount Rate - Also known as the hurdle rate or required rate of return, is the rate that a project must achieve in order to be accepted rather than rejected.
Return on Investment – Expected income divided by the amount originally invested
Payback Analysis – The number of years needed to recover the initial cash outlay.
Formulas
NetPresentValue = (t=1..n A * (1+r)-t OR (t=1..n A/ (1+r)t
Where A = Cash flow
r = Required rate of return
t = year of cash flow
n = the nth year
Return On Investment = (Discounted Benefits – Discounted Costs) / Discounted Costs
Payback Period = Years taken to repay initial outlay .
Eg. Project Z Outlay = $ 4000
Yearly cash flows = $2000...

...these two currencies is 1 euro =1.3118 dollars so in order to make easier the case we will use 1.31 to round it up.
The politics of the Group related to the management of the risk of change foresee, as a rule, the coverage of the future commercial flows that you/they will have bookkeeping demonstration within 12 months and of the orders acquired (or committed in progress) to put aside from their expiration. It is reasonable to believe that the relative effect of coverage suspended in the Reserve of cash flow hedge will primarily be in relief to economic account in the following exercise.
The Group is exposed to consequential risks by the variation of the rates of change, that you/they can influence on its economic result and on the value of the clean patrimony. Particularly:
Whereas the societies of the Group sustain costs denominated in different currencies by those of denomination of the respective proceeds, the variation of the rates of change can influence the Result operational of such societies. In 2012, the general amount of the commercial flows directly statements to the risk of change you/he/she has been equivalent to 10% around of the billing. Gives the last budget of Fiat the total billing of 83 billion of euro therefore the figure that we will go to analyze is equal to 830 million of Euro.
CASE STUDY
The Group, which operates in numerous markets worldwide, is naturally exposed to market risks stemming from fluctuations in currency and...

...uniform
The cost of a proposal is $ 10,000. The cash flows are as follows:
Year Cash flows
1 2500
2 2500
3 2500
4 2500
5 2500
6 2500
Calculate Pay Back Period (PBP)
When the cash flows are not uniform
1. There are two Proposals. Proposal A and Proposal B. Both cost the amount of $ 60,000. The discount rate is 10%. The cash flows before depreciation and tax are as follows:
Year Proposal A Proposal B
$ $
0 (60,000) (60,000)
1 18,000 19,000
2 15,000 17,000
3 18,000 19,000
4 16,000 14,000
5 19,000 15,000
6 14,000 13,000
Evaluate the above proposals according to:
1. Pay Back Period.
2. Accounting Rate of Return (ARR)
3. Netpresentvalue method (NPV)
Proposal A is better than B, because ARR and NPV are higher than Proposal B
2. There are two Proposals. Proposal A and Proposal B. Proposal A costs $ 80,000 and Proposal B costs $ 100,000. The discount rate is 10%. The cash flows before depreciation and tax are as follows:
Year Proposal A Proposal B
$ $
1 13,000 15,000
2 15,000 14,000
3 18,000 19,000
4 16,000 16,000
5 19,000 13,000
6 14,000 13,000
7 16,000 19,000
8 20,000 15,000
9 0 18,000
10 0 17,000
Evaluate the above proposals according to:
1. ARR
2. NPV
3. Pay Back Period...

...cash flows to promptly recover its cost? b Will an investment generate an acceptable rate of return? c Will an investment have a positive netpresentvalue? d Will an investment have an adverse effect on the environment? 3 Which of the following is not considered when using the payback period to evaluate an investment? a The profitability of the investment over its entire life. b The annual net cash flow of the investment. c The cost of the investment. d The expected life of the investment. Use the following data for questions 4 and 5. Stone Mfg. is considering expanding operations by investing $300,000 in equipment. The equipment has a useful life of eight years, with no salvage value. Straight-line depreciation is used. Stone predicts that net income will increase $37,500 per year as a result of this strategy. 4 Refer to the above data. The payback period for this investment is: a 8 years. b 4 years. c Over 13 years. d 2.5 years. 5 Refer to the above data. Return on average investment for this investment is: a 25%. b 20%. c 12 1/2%. d 15%.
CHAPTER 26 10-MINUTE QUIZ B
NAME SECTION
#
Physician’s Pharmacy is considering the purchase of a copying machine which it will make available to customers at a per-copy charge. The copying machine has an initial cost of $7,500, an estimated useful life of five years, and an estimated salvage value of $500. The estimated annual...

...(Worth 1 points)
Which of the following NOT correct?
Independent or non-mutually exclusive alternatives can be accepted at the same time.
The modified internal rate of return assumes that inflow are reinvested at 80 percent of the internal rate of return
This is a correct answer
It is the difference in the reinvestment assumptions that can be significant in determining when to use the presentvalue or internal rate of return methods.
Under the netpresentvalue method, cash flows are assumed to be reinvested at the firm's weighted average cost of capital
Points earned on this question: 1
Question 2 (Worth 1 points)
A project has initial costs of $3,000 and subsequent cash inflows in years 1 – 4 of $1350, 275, 875, and 1525. The company's cost of capital is 10%. Calculate IRR for this project.
10.00%
11.75%
12.25%
This is a correct answer
13.15%
Points earned on this question: 0
Question 3 (Worth 1 points)
The Internal Rate of Return of a capital investment…
Changes when the cost of capital changes
Is equal to the annual net cash flows divided by one half of the project’s cost when the cash flows are an annuity
Must exceed the cost of capital in order for the firm to accept the investment
This is a correct answer
None of the above options are correct
Points earned on this question: 0
Question 4 (Worth 1 points)...

...bond offers a 4% coupon rate, paid semiannually. The market price of the bond is $1,000, equal to its par value.
a. What is the payback period for this bond?
b. With such a long payback period, is the bond a bad investment?
c. What is the discounted payback period for the bond assuming its 4% coupon rate is the required return? What general principle does this example illustrate regarding a project’s life, its discounted payback period, and its NPV?
A8-1. a. Payback on this bond is 25 years. You pay $1,000. You receive $40 a year for 25 years, a total of $1,000.
b The bond is not necessarily a bad investment. Payback does not take time value of money into account, nor does it account for cash flows received after the payback period. It is more appropriate to calculate the NPV of an investment. Given the risk level of the bond, is 4% a fair return? If the answer is yes, then the bond may be a good investment.
c The discounted payback, using a 4% discount rate, is 30 years. This shows that unless the acceptable payback period is decreased when discounted payback is used, vs. regular payback, then projects which return money late in the life of the investment are even more disadvantaged under discounted payback than under regular payback. NPV is a more appropriate method to use to determine the value of an investment project.
P8-4. Calculate the netpresentvalue (NPV) for the...