Calculate the net present value and discounted payback period for Project A.
Question:
Manhheim Biotechnology Limited is expanding the business by considering investing in some profitable projects. Stevenson, a project manager of Mannheim, was asked to estimate the cost of capital and evaluate the following projects:
Table 1. Project cash flows (in millions).
| Year | 0 | 1 | 2 | 3 | 4 |
| Project A | (100.00) | 10.00 | 50.00 | 40.00 | 20.00 |
| Project B | (200.00) | 80.00 | 90.00 | 85.00 | 10.00 |
| Project C | (300.00) | 105.00 | 90.00 | 110.00 | 20.00 |
Albert, the chief finance officer (CFO) of Mannheim, has provided him some relevant information:
The current bond price of Mannheim's 10% coupon, semi-annual payment with 10 years left to maturity is $1,134.20. The par value of the bon is $1,000. The company's tax rate is 40%.
The current price of the preferred stock is $31.25 with annual dividend payment of $3.75.
Mannheim's common stock is currently selling for $45 per share. Its last dividend payment was $3.25 and dividend is expected to grow at a constant rate of 3% in the foreseeable future. Mannheim's beta is 1.2, the risk free rate is 6%, and the market risk premium is estimated to be 4%. For the bond-yield-plus-risk-premium approach, the firm uses a risk premium of 4% with the yield on the Treasury bond of 6.5%.
Sharron, a finance manager of Mannheim, has $400 million capital available consisting of $160 million debt, $140 million preferred stock and $100 million common stock.
Calculate the net present value and discounted payback period for Project A.
Capital Budgeting:
Capital Budgeting is very important in construction planning. This is a tool used to minimize the period expended for the construction or acquisition of a capital asset. Also, this is used in revising a plan due to changes in environmental factors.
Answer and Explanation: 1
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View this answer| WACC | 9% |
| Year | Cash flow | Factor | Present value |
| Y0 | -100 | 1 | -100 |
| Y1 | 10 | 0.916 | 9.16 |
| Y2 | 50 | 0.839 | 41.95 |
| Y3 | 40 | 0.768 | 30.72 |
| Y4 | 20 | 0.703 | 14.06 |
| NPV... |
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Chapter 3 / Lesson 13Learn about capital budgeting decisions with examples. See different types of capital budgeting techniques, such as payback period and internal rate of return.