Don\'t forget to sign this homework and save the file under appropriate name! Pr

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Don't forget to sign this homework and save the file under appropriate name! Principles of Business Finance Homework #5 (40 points) This object an inves f this homework is to calculate Net Present Value, as well as other measures of oject values. Show the detailed calculations to get full credit for each question! When finishea, sign the homework document and submit the file to Canvas under the last name by specified deadline in MS Word 2013 file format or higher. Failure to comply with submission requirement may result in grade reduction! Section 1 (32 points). Net Present Value, Internal Rate of Return, Profitability Index Vandalay Industries, Inc. needs $24 million to upgrade a factory that it purchased last year. The company's financial managers forecast that newly upgraded factory will generate the yearly sales revenue of $12.2 million during next twenty years. The total annual costs of operating the factory are estimated to be $8.4 million on average. At the end of this twenty-year period, the remaining machinery and equipment will be worth $3.51 million as salvage. Given this information, answer the questions below on the next page.

Explanation / Answer

1) Yearly net revenue = 12200000-8400000 = 3800000 PV of net revenue =3800000*PVIFA(12,20) = 3800000*7.4694 = 28383720 PV of salvage value = 3510000*PVIF(12,20) =3510000*0.1037 = 363987 PV of cash inflows 28747707 Less: Initial investment 24000000 NPV 4747707 Number of shares outstanding 10000000 NPV per share $            0.47 The price of the share will increase by $0.47 2) PV of net revenue =3800000*PVIFA(15,20) = 3800000*6.2593 = 23785340 PV of salvage value = 3510000*PVIF(15,20) =3510000*0.0611 = 214461 PV of cash inflows 23999801 Less: Initial investment 24000000 NPV -199 Number of shares outstanding 10000000 NPV per share $           -0.00 The share price will remain unchanged. 3) PV of net revenue =3800000*PVIFA(18,20) = 3800000*5.3527 = 20340260 PV of salvage value = 3510000*PVIF(18,20) =3510000*0.0365 = 128115 PV of cash inflows 20468375 Less: Initial investment 24000000 NPV -3531625 Number of shares outstanding 10000000 NPV per share $           -0.35 As the NPV is negative, the project should not be undertaken. The share price will decrease by $0.35, if the project is underaken. 4) The IRR is that discount rate for which NPV = 0. In the calculations made above, NPV is almost 0 for 15%/ Hence, approximate IRR = 15%. 5) PI with cost of capital of 12% = 28747707/24000000 = 1.20 PI with cost of capital of 15% = 23999801/24000000 = 1.00 PI with cost of capital of 18% = 20468375/24000000 = 0.85 Where NPV is positive, PI>1 and where NPV is negative PI1 and rejected if PI

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