FIN400 Capital Budgeting Criteria Project
FIN400 Capital Budgeting Criteria Project
1.
Quite often, there are no enough track-records for early stage ventures. Explain how to forecast the sales for new ventures.
2.
capital budgeting criteria:
You are given the following cash flow of a project with a discount rate of 7%. Calculate the Net Present Value, Internal Rate of Return, Profitability Index, and Payback Period.
| Year | Cash.Flow |
| 0 | -17000 |
| 1 | 4500 |
| 2 | 8700 |
| 3 | 11900 |
Net present value = ??
Internal Rate of Return = ??
Profitability Index = ??
Payback period = ??
3.
Your firm recorded sales for the most recent year of $10 million generated from an asset base of $7 million, producing a $500,000 net income. Sales are projected to grow at 20%, causing spontaneous liabilities to increase by $200,000. In the most recent year, $200,000 was paid out as dividends, and the current payout ratio will continue in the upcoming years. What is your firm’s AFN?
Hint:
g = growth rate of sales = ??
S0 = current sales = ??
S1 = new sales = S0 * (1+g) = ??
A0 = current asset = ??
NI0 = current profit = ??
NI0 / S0 = current profit margin = ??
RR0 = Retention ratio = 1 – Dividend / Net profit = ??
Change of Assets = A0 * g= ??
Change of Liability = ??
Addition to Retained Earnings = S1 * (NI0 / S0) * RR0 = ??
AFN = Change of Assets – Change of Liabilities – Addition to Retained Earnings = ??
4.
Petal Providers Corporation opens and operates “mega” floral stores in the U.S. The idea behind the super store concept is to model the U.S. floral industry after its European counterparts whose flower markets generally have larger selections at lower prices. Revenues were $1 million with net profit of $50,000 last year when the first “mega” Petal Providers floral outlet was opened. If the economy grows rapidly next year, Petal Providers expects its sales to growth by 50 percent. However, if the economy exhibits average growth, Petal Providers expects a sales growth of 30 percent. For a slow economic growth scenario, sales are expected to grow next year at a 10 percent rate. Management estimates the probability of each scenario occurring to be: rapid growth (.30); average growth (.50), and slow growth (.20). Petal Providers net profit margins are also expected to vary with the level of economic activity next year. If slow grow occurs, the net profit margin is expected to be 5 percent. Net profit margins of 7 percent and 10 percent are expected for average and rapid growth scenarios, respectively. Hint: fill in the table below.
- Estimate the average sales growth rate for Petal Providers for next year.
- Estimate the dollar amount of sales expected next year under each scenario, as well as the expected value sales amount.
- Estimate the dollar amount of net profit expected next year under each scenario, as well as the expected value net profit amount.
Hint: use the following table to complete the calculations.
| Probability | growth rate | sales | net profit | |
| Rapid growth | ? | ? | ? | ? |
| average growth | ? | ? | ? | ? |
| slow growth | ? | ? | ? | ? |
| Expected (average) | ? | ? | ? |
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