Corporate Finance Assignment 1 Q&A

QUESTION 1: Fuji Software, Inc. has the following mutually exclusive projects. Year Project A Project B 0 -$15,000 -$18,000 1 9,500 10,500 2 6,000 7,000 3 2,400 6,000 a) Suppose Fuji’s payback period cutoff is two years. Which of these projects should be choosen? b) Suppose Fuji uses the NPV rule to rank these two projects. Which project should be choosen if the appropriate discount rate is 15%? QUESTION 2: An investment project has annual cash inflows of $5,000, $5,500, $6,000 and $7,000 and a discount rate of 14%. What is the discounted payback period for these cash flows if the initial cost is $8,200? What if the initial cost is $12,000? What if it is $16,000? Question 3: Halo Project, a game manufacturer, has a new idea for an adventure game. It can market the game either as a traditional board game or as an interactive DVD, but not both. Consider the following cash flow of the two mutually exclusive projects of Halo Project. Assume the discount rate for Halo Projects is 10%. Question 4 Hutti Gold Mines Limited (HGML) is a gold mining and production business in India. The mines used by HGML are mainly located in Hutti-Muski Precambrian greenstone geological belt. Assume the company is exploring new mines sites in India, and the management estimates that the new site will be productive for ten years. Based on the information provided by the company’s geologist, the company’s financial officer has to perform an analysis of the new site and make recommendation on whether the company should open it. The financial officer has used the information provided by the geologist and estimated the expected revenue, expenses of opening the mine and the annual operating expenses. If the company opens the mines, it will cost $500 million today, and it will have a cash outflow of $50 million at year 10 to close the mines site. The expected cash flows each year from the mine are shown in the following table. The company has a 15% required return on the new sites.