Sometimes people ask me how my studies are going. I ask myself this question frequently. Here is the answer....
The following is an exercise which we completed at the end of yesterday's session. It takes longer to write the question down than it does to solve it.
The following is an exercise which we completed at the end of yesterday's session. It takes longer to write the question down than it does to solve it.
A company is examining the possibility of investing in the following project: the project requires an initial investment in equipment and supplies at a cost of $100,000. Operating the equipment will require an improvement in the water filtering capability which will cost $20,000. The project also requires working capital of $54,000; this capital will be kept at the same level throughout the project's lifespan.
The company completed a marketing survey which examined the demand for the project and paid $10,000 for this. The company expects that the project will last for eight years, in which time the income will be $45,000 for the first five years and $30,000 for the next three years. Expenses are expected to be $4,000 per year.
Running the project will cause a loss in income of $3,000 per year from other projects of the company. The company depreciates the cost of equipment at a constant rate of the project's lifetime with an expected residual value of $0. The company's economists expect that at the end of the project it will be possible to sell the equipment for $10,000.
Tax is paid at the rate of 30%, on cash income from the same year. The project will be financed from equity (shares) and bonds which have a nominal interest rate of 5.8% per annum. The average weighted capital cost of the company is 12% per annum.
Would you recommend the company to carry out the project? Present a cash flow statement and NPV calculation in order to support your recommendation.
The company completed a marketing survey which examined the demand for the project and paid $10,000 for this. The company expects that the project will last for eight years, in which time the income will be $45,000 for the first five years and $30,000 for the next three years. Expenses are expected to be $4,000 per year.
Running the project will cause a loss in income of $3,000 per year from other projects of the company. The company depreciates the cost of equipment at a constant rate of the project's lifetime with an expected residual value of $0. The company's economists expect that at the end of the project it will be possible to sell the equipment for $10,000.
Tax is paid at the rate of 30%, on cash income from the same year. The project will be financed from equity (shares) and bonds which have a nominal interest rate of 5.8% per annum. The average weighted capital cost of the company is 12% per annum.
Would you recommend the company to carry out the project? Present a cash flow statement and NPV calculation in order to support your recommendation.
Straightforward, no? Yet this is the sort of thing which financial MBAs face every day (ok, not every day, but maybe every few months). I imagine that everyone in the class understood the question and all the items contained within, although I doubt whether everyone could solve it without being shown how.
Here comes the answer to the question which I posed at the beginning of this post (how are your studies going?) - I wouldn't say that it's easy but the course isn't hard (I solved the above question while the lecturer was about half way through explaining the items). It just doesn't do anything for me; it doesn't exercise my intellect. I'm not enjoying this course as much as I have enjoyed others, although of course, my enjoyment is irrelevant to the final mark or whether I am going to use this material in my daily life. But when one studies primarily for one's enjoyment and intellectual stimulation, then the course should provide that stimulation.
By the way, the project is not recommended, with an NPV of -$9,179.
No comments:
Post a Comment