MBA 631 Module Five Problems 2015

| June 2, 2016

Question
MBA 631: Module Five Problems

Problem 5-1:

Your task is to analyze two mutually exclusive projects:
Year Cash Flow Project X Cash Flow Project Z
-0- -400,000 -50,000
1 25,000 20,000
2 60,000 15,000
3 60,000 20,000
4 540,000 20,000
Whichever project you chose, if any, you require a 15% return on your investment.

A] Using the payback criterion, which investment should you chose? Why?

B] Using the discounted payback criterion, which investment should you chose? Why?

C] Using the NPV criterion, which investment should you chose? Why?

D] Using the IRR criterion, which investment should you chose? Why?

E] Using the profitability index criterion, which investment should you chose? Why?

F] Based on your analysis in (A) thru (E), which investment should you finally chose? Why?

Problem 5-2:

You are required to submit a bid to supply 200,000,000 widgets per year to the State of Illinois for the next five years. Your company has an idle tract of real estate that cost $1,500,000 ten years ago; if your company sold the land today, it would generate $3,000,000 after the taxes were paid. The land can be sold for $3,500,000 after taxes in five years. You will need to install $4,900,000 in new plant and equipment to actually produce the widgets; this plant and equipment will be depreciated straight-line to zero over the projects five year life. The equipment can be sold for $610,000 at the end of the project. You will need $500,000 in initial working capital for the project, and an additional investment of $60,000 in every year thereafter. Your production costs are .6 cents per widget and you will have fixed costs of $800,000 per year. If your tax rate is 34% and your required return is 14%, what bid price per widget should you submit?

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