FIN 515 week 5 assignment
Complete the following graded
homework assignment in a Word document named
FIN515_Homework5_yourname. Show the details of your calculation and work
in your answer to the problems.
Problems (p. 228)
7-20 Payback and NPV Problems (p.
228)
7-21 NPVs and IRR's for Mutually
Exclusive Projects
Problems (p. 260)
8-1 Forecasting Earnings
20. You are considering making a
movie. The movie is expected to cost $10 million upfront and take a year to
make. After that, it is expected to make $5 million when it is released in one
year and $2 million per year for the following four years. What is the payback
period of this investment? If you require a payback period of two years, will
you make the movie? Does the movie have positive NPV if the cost of capital is
10%?
Choosing Between Projects
21. You are deciding between two
mutually exclusive investment opportunities. Both require the same initial
investment of $10 million. Investment A will generate $2 million per year
(starting at the end of the first year) in perpetuity. Investment B will
generate $1.5 million at the end of the first year and its revenues will grow
at 2% per year for every year after that.
a. Which investment has the higher IRR?
b. Which investment has the higher NPV when
the cost of capital is 7%?
c. In this case, for what values of the
cost of capital does picking the higher IRR give the correct answer as to which
investment is the best opportunity?
Forecasting Earnings
8.1 Pisa Pizza, a seller of
frozen pizza, is considering introducing a healthier version of its pizza that
will be low in cholesterol and contain no trans fats. The firm expects that
sales of the new pizza will be $20 million per year. While many of these sales
will be to new customers, Pisa Pizza estimates that 40% will come from
customers who switch to the new, healthier pizza instead of buying the original
version.
a. Assume customers will spend the same
amount on either version. What level of incremental sales is associated with
introducing the new pizza?
b. Suppose that 50% of the customers who
will switch from Pisa Pizza’s original pizza to its healthier pizza will switch
to another brand if Pisa Pizza does not introduce a healthier pizza. What level
of incremental sales is associated with introducing the new pizza in this case?
TUTORIAL PREVIEW
a. Assume customers will
spend the same amount on either version. What level of incremental sales is
associated with introducing the new pizza?
Incremental sales =
Sales of new pizza – lost sales of original
= 20-0.40(20)
=
$12 million
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