12 May Details:Complete the following problems from chapter 12 in the textbook:
Details:
Complete the following problems from chapter 12 in the textbook:
P12-3
P12-4
P12-8
P12-12
P12-14
P12-18
Follow these instructions for completing and submitting your assignment:
Do all work in Excel. Do not submit Word files or *.pdf files.
Submit a single spreadsheet file for this assignment. Do not submit multiple files.
Place each problem on a separate spreadsheet tab.
Label all inputs and outputs and highlight your final answer.
Follow the directions in “Guidelines for Developing Spreadsheets.”
P12–3 Breakeven cash inflows and risk Blair Gasses and Chemicals is a supplier of highly
purified gases to semiconductor manufacturers. A large chip producer has asked Blair
to build a new gas production facility close to an existing semiconductor plant. Once
the new gas plant is in place, Blair will be the exclusive supplier for that semiconductor
fabrication plant for the subsequent 5 years. Blair is considering one of two plant
designs. The first is Blair’s “standard” plant, which will cost $30 million to build. The
second is for a “custom” plant, which will cost $40 million to build. The custom plant
will allow Blair to produce the highly specialized gases that are required for an emerging
semiconductor manufacturing process. Blair estimates that its client will order
$10 million of product per year if the traditional plant is constructed, but if the customized
design is put in place, Blair expects to sell $15 million worth of product annually
to its client. Blair has enough money to build either type of plant, and, in the absence
of risk differences, accepts the project with the highest NPV. The cost of capital is 12%.
a. Find the NPV for each project. Are the projects acceptable?
b. Find the breakeven cash inflow for each project.
c. The firm has estimated the probabilities of achieving various ranges of cash inflows for the two projects as shown in the following table. What is the probability that each project will achieve at least the breakeven cash inflow found in part b?
d. Which project is more risky? Which project has the potentially higher NPV? Discuss the risk–return trade-offs of the two projects.
e. If the firm wished to minimize losses (that is, NPV < $0), which project would you recommend? Which would you recommend if the goal were to achieve a higher NPV?
P12–4 Basic scenario analysis Murdock Paints is in the process of evaluating two mutually
exclusive additions to its processing capacity. The firm’s financial analysts have developed
pessimistic, most likely, and optimistic estimates of the annual cash inflows
associated with each project. These estimates are shown in the following table.
a. Determine the range of annual cash inflows for each of the two projects.
b. Assume that the firm’s cost of capital is 10% and that both projects have 20-year lives. Construct a table similar to this one for the NPVs for each project. Include the range of NPVs for each project.
c. Do parts a and b provide consistent views of the two projects? Explain.
d. Which project do you recommend? Why?
P12–8 Risk-adjusted discount rates: Basic Country Wallpapers is considering investing in
one of three mutually exclusive projects, E, F, and G. The firm’s cost of capital, r, is
15%, and the risk-free rate, Rғ, is 10%. The firm has gathered the basic cash flow
and risk index data for each project as shown in the following table.
a. Find the net present value (NPV) of each project using the firm’s cost of capital.
Which project is preferred in this situation?
b. The firm uses the following equation to determine the risk-adjusted discount
rate, RADRj, for each project j:
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