BUSN 5200 Week 8 Homework Assignment

| August 14, 2017

For Week 8, please turn in the answers to the following questions:1. List the three steps that make up the general approach to capital budgeting.2. Define an Incremental cash flow as the term is used in capital budgeting3. Your firm is considering buying a new machine that costs $200,000, is expected togenerate $110,000 in new revenue each year and will cost $45,000 a year to operate.If your firm’s marginal income tax rate is 35% what is the Net Cash Flow your firmwill realize from the new machine during the first year? Assume the MACRSdepreciation rate for the machine for year 1 is 20%. Note – do not include the cost ofthe machine in your answer.4. Define the payback period method in capital budgeting and state the payback perioddecision rule.5. What is the payback period of the following project?Initial Investment:$50,000Projected life:8 yearsNet cash flows each year: $10,0006. Consider the following income statement and answer the questions that follow:Sales (100 units)$200Variable costs ($.80 ea) 80Fixed Costs20EBIT100Interest Expense30EBT70Income tax24Net Income46a. What is the firms Breakeven Point in units?b. Draw a breakeven chart for this firm.7. Define the Net present Value (NPV) method in capital budgeting and state the NPVdecision rule. In economic terms, what does the NPV amount represent?8. Your firm is looking at a new investment opportunity, Project Alpha, with net cashflows as follows:—- Net Cash Flows —Project AlphaInitial Cost at T-0 (Now)cash inflow at the end of year 1cash inflow at the end of year 2cash inflow at the end of year 3($10,000)6,0004,0002,000Calculate project Alpha’s Net Present Value (NPV), assuming your firms requiredrate of return is 10%.9. Define the Internal Rate of Return (IRR) method in capital budgeting and state theIRR Decision rule.10. Calculate the IRR of the following project:Year01Cash Flow-$30,000$40,000Case Study Tasks:1. Refer to the Case Study topic lecture on the Week 7 Content page. Using thatinformation as a guide, complete the Summary and Conclusion section of your report.Then review your entire report, polishing it for final submission as required. At theend of the week submit your final, formal report along with your regular homework(use a separate file for the report).

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