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Latihan 2 - Zahra Maryam Ashri 220918324

The document contains 3 questions about investment projects: 1) A $400 million investment in new equipment by Fullen Machenery is expected to generate $700 million in after-tax cash flows, increasing the company's value by $300 million. This would increase Fullen's stock price from $36 to an estimated $37.50 per share. 2) A $5,000 copier investment is expected to generate $3,000, $2,000, and $2,000 over 3 years. It has a payback period of 2 years, IRR of 20.64%, and NPV of $882.79. 3) Two projects have a 12% required return:

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Zahra Maryam Ashri
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43 views3 pages

Latihan 2 - Zahra Maryam Ashri 220918324

The document contains 3 questions about investment projects: 1) A $400 million investment in new equipment by Fullen Machenery is expected to generate $700 million in after-tax cash flows, increasing the company's value by $300 million. This would increase Fullen's stock price from $36 to an estimated $37.50 per share. 2) A $5,000 copier investment is expected to generate $3,000, $2,000, and $2,000 over 3 years. It has a payback period of 2 years, IRR of 20.64%, and NPV of $882.79. 3) Two projects have a 12% required return:

Uploaded by

Zahra Maryam Ashri
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Zahra Maryam Ashri

2201918324

1. Fullen Machenery is investing $400 million in new industrial equipment. The present
value of the future after-tax cash flows resulting from the equipment is $700 million.
Fullen currently has 200 million shares of common stock outstanding, with a current
market price of $36 per share. Assuming that this project is new information and is
independent of other expectations about the company, what is the theoretical effect of
the new equipment on Fullen’s stock price?

Answer :

When the company purchase the new equipment for 400 million dollars. This will
add assets. Where the asset will be use to generate revenue about 700 million dollars
cash in flow. Which results in a net present value of 300 million dollars. When the
company got an additional profit (net present value) of 300 million dollars. This
profit can increase dividends amount and attract the investor to buy stock. also the
additional profit will add the value of retain earnings that may change the stock price.
In this case, it may increase the price of stock.

Simulation

 Without new equipment


Stock : 200 million
Price of stock : $36

 With new equipment


NPV = $700 million - $400 million = $300 million
Additional price of stock = $ 300 million / 200 million = $1.5
New Price of stock = $36 + $1.5 = $37.5

2. A company is considering the purchase of copier that costs $5,000. Assume a require
rate of return of 10% and the following cash flow schedule: end of year 1: $3,000;
year 2:
$2,000; and year 3: $2,000.

a. What is the project’s payback period?


b. What is the project’s discounted payback period?
c. What is the project’s NPV?
d. What is the project’s IRR?
e. What is the project’s profitability index (PI)?

Answer :

Calculate using excel

Investasi Year 1 Year 2 Year 3 Total


-$5.000,00 $3.000,00 $2.000,00 $2.000,00 $7.000,00
1,1 1,21 1,331
PV $2.727,27 $1.652,89 $1.502,63 $5.882,79

PI = 5000/5.882,79 1,18
NPV = 5.882,79-5.000 $882,79
Payback period 2 years
IRR 20,64%
Discounted payback period
= 2 + ((5000-
(2.727,27+1.652,89))/1.502,63
) 2,41 years

R IRR
10% < 20,64% accepted

3. An analyst has gathered the following data about two projects, each with a 12%
required rate of return.

Project Y Project Z
Initial cost $15,000 $20,000
Life 5 years 4 years
Cash inflows $5,000/year $7,500/year

a. If the projects are independent, which project should be accepted?


b. If the projects are mutually exclusive, which project should be rejected?

Answer :

Calculate using excel

Proyek Y
Year
Investment 1 2 3 4 5 Total
-15000 5000 5000 5000 5000 5000
1,12 1,2544 1,404928
1,57351936 1,762341683
4464,28571 3177,59039
PV 4 3985,969388 3558,901239 2 2837,134279 18023,88101
3023,88101
NPV 2
IRR 19,86% > R 12%

Proyek Z
Investme Year Total
nt 1 2 3 4
-20000 7500 7500 7500
7500
1,5735193
1,12 1,2544 1,404928 6
6696,4285 5978,9540 5338,3518 4766,3855 22780,12
PV 71 82 59 88 01
NPV 2780,1201
IRR 18,45% > R 12%

a. Both project Z and project Y will be accepted, because both NPV value of the
projects are positive.
b. Project Z will be rejected, because the project Z’s NPV is lower than Project Y’s
NPV. In other hand, the Project Z’s IRR values are lower than Project Y’s IRR as
well.

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