Tutor profile: Niraj A.
Subject: Corporate Finance
Two mutually exclusive projects with unequal lives question( with NPV of both the machines given) Required to analyze which machine should be selected by using Equivalent annuity approach
Answer: According to the equivalent annuity approach, Project W should be selected because the EAA of Project W is higher than the EAA of Project WW. The EAA of Project W is $11,904.73 whereas the EAA of project WW is $7,264.66. Below are the steps that help us reach the conclusion: Step 1 Calculate the equivalent annual annuity of Project W with Project W’s NPV = $20,661.17, I = 10%, and n = 2. EAA = (i x NPV) / (1 - (1+i)^-n) = (10% * 20661.17) / (1 - (1+10%)^-2) = 11904.73 Step-by-step 2 Calculate the equivalent annual annuity of Project WW with Project WW’s NPV = $23,027.80, I = 10%, and n = 4. EAA = (i x NPV) / (1 - (1+i)^-n) = (10% * 23027.80) / (1 - (1+10%)^-4) = 7264.66
Question was to comment on the change in balance sheet position of an average american household from 2004 -2007 , 2007 - 2010 and 2010 -2017
During the period 2004-2007, the financial position of an average household did not improve significantly. During the period 2007-2010, the financial position of an average household deteriorated severely. During the period 2010 -2017, the financial position of an average household improved significantly. 2004-2007: The average net worth increased merely by $1,300 during this period, showing no evidence of significant improvement in balance sheet position. 2007-2010: The average net worth decreased by more than $30,000 per household during this period. This was caused by the financial crisis of 2008 leading to a decrease in value of assets and increasing liabilities. 2010-2017: The average net worth increased by 57% in this period showing significant improvement in balance sheet position.
A balance sheet was given where the net fixed assets figure for two years were given and an income statement was attached. Using that find out the free cash flow.
Calculate investment in fixed assets (IFA). Step 1: IFA = Δ Net Fixed Assets + Depreciation = ($15 Million − $12 Million) + $1 Million = $4 Million Step 2 Calculate the free cash flow (FCF) by using the inputs described below: Tax rate(t) = 25% Depreciation (Dep) = $1 million FCF = EBIT x (1 -t) + Dep - IFA - Δ NOWC = $5 Million x (1 − 0.25) + $1 Million − $4 Million − 0 = $750,000
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