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发表于 2009-7-1 17:48
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Felipe da Rocha Case Scenario
Felipe da Rocha, CFA, heads the capital budgeting committee for Brasilia Distribuidora, SA (BD), a privately held Brazilian electronic components wholesaler. The committee has two utually exclusive proposals to evaluate. One proposal is from BD’s Northern Division, which equests BRL 30 million (Brazilian real) to construct a new distribution center. Specific details of this proposal are presented in Exhibit 1. The second proposal is from BD’s Southern ivision, which requests BRL 25 million to form a joint venture with a producer of electrical components. Details of this proposal are presented in Exhibit 2.
In the case of the distribution center, the entire project will be sold in six years when a new highway opens between BD’s primary customers in the north. The initial term of the joint venture is three years. BD can extend the joint venture for three more years by replicating the project as shown in Exhibit 2 (e.g., identical capital outlay as well as cash inflows, outflows, and alvage value). At the end of the joint venture, BD will transfer its interests to the joint venture partner. At least initially, both projects will be analyzed using a 10 percent discount rate.
Selected data for Brasilia Distribuidora are shown in Exhibit 3.
Prior to selecting between the two proposals, the capital budgeting committee asks da Rocha to ddress the following questions:
1. Asuming that the net present value (NPV) of the distribution center is approximately BRL 30 million and using a discount rate of percent, can the joint venture proposal be analyzed using the equivalent annual annuity method?
2. Because a contract for electrical components remains under negotiation, the joint venture partner wants to evaluate the project with annual operating costs that are 20 percent higher than originally forecast. How will this impact the project’s NPV, assuming a discount rate of 10 percent and a term of three years, while holding all else constant?
3. If the joint venture project’s levered beta were 1.2, instead of equal to that of BD’s typical project, what would be the appropriate required rate of return on
equity?
4. What may we conclude about the use of NPV or internal rate of return (IRR) methods as a selection criterion for mutually exclusive projects?
25. The total after-tax cash flow (in BRL thousands) to be derived from the proposed distribution center in its terminal year is closest to:
A. 35,200.
B. 53,600.
C. 55,200.
Answer: C
“Capital Budgeting,” John D. Stowe, CFA, and Jacques R. Gagné, CFA 2009 Modular Level II, Volume 3, pp. 30-38 Study Session 8-28-a Compute the yearly cash flows of an expansion capital project and of a replacement capital project, and evaluate how the choice of depreciation method affects those cash flows.
The total after-tax cash flow (BRL thousands) for the distribution center in its terminal year (year 6) would be calculated as:
26. Using the assumptions from question 1 asked of da Rocha, the equivalent annual annuity (in BRL millions) for the distribution center project would be closest to:
A. 3.89.
B. 5.00.
C. 6.89.
Answer: C
“Capital Budgeting,” John D. Stowe, CFA, and Jacques R. Gagné, CFA 2009 Modular Level II, Volume 3, pp. 40-42
Study Session 8-28-c Evaluate and select the optimal capital project in situations of (1) mutually exclusive projects with unequal lives, using either the least common multiple of lives approach or the equivalent annual annuity approach, and (2) capital rationing. The correct calculation of the equivalent annuity for the distribution center is as follows: PV = BRL 30 million (given in statement 1), FV = 0, N = 6 years, i= 10.0% Compute PMT = 6.8882 rounded to 6.89 million
27. da Rocha’s most accurate response to question 2 is that NPV (in BRL thousands) will most likely be reduced by:
A. 7,958.
B. 11,937.
C. 19,895.
Answer: B
“Capital Budgeting,” John D. Stowe, CFA, and Jacques R. Gagné, CFA 2009 Modular Level II, Volume 3, pp. 44-45 Study Session 8-28-d Explain how sensitivity analysis, scenario analysis, and Monte Carlo simulation can be used to assess the stand-alone risk of a capital project. The correct calculation uses the marginal annual after-tax cash flow impact, then discounts that three-year annuity at the given rate of 10%, as follows:
28. da Rocha’s most accurate response to question 3 is that the required rate of return on
equity for the joint venture project would be closest to:
A. 9.50%.
B. 10.50%.
C. 15.90%
Answer: B
“Capital Budgeting,” John D. Stowe, CFA, and Jacques R. Gagné, CFA 2009 Modular Level II, Volume 3, pp. 50-53
Study Session 8-28-e Discuss the procedure for determining the discount rate to be used in valuing a capital project, and calculate a project’s required rate of return using the CAPM. The correct discount rate for a project depends on the risk of the project. Because the risk of the joint venture project is perceived to be greater than for BD’s typical projects, the 10.00% discount rate typically employed by BD is too low. The CAPM would estimate the discount rate as follows: = 9.5 – 5.0 = 4.5% = + β x [E( –]= 4.5% + 1.2 x [9.5% - 4.5%] = 4.5% + 1.2 x [5.0%] (expected market risk premium also given in Exhibit 3 as 5.0%) = 4.5% + 6.0% = 10.5%
29. da Rocha’s most accurate response to question 4 is that:
A. projects with longer lives will offer higher IRRs.
B. IRR and NPV methods can differ in their selection of such projects.
C. for projects with non-conventional cash flows, IRR is more economically meaningful than NPV.
Answer: B
“Capital Budgeting,” John D. Stowe, CFA, and Jacques R. Gagné, CFA 2009 Modular Level II, Volume 3, pp. 19-26, 40-42, 58-59
Study Session 8-28-c, g
Evaluate and select the optimal capital project in situations of (1) mutually exclusive projects with unequal lives, using either the least common multiple of lives approach or the equivalent annual annuity approach, and (2) capital rationing. Discuss common capital budgeting pitfalls.
The NPV and IRR selection criteria can differ in their selection of mutually exclusive projects.
30. If the proposed distribution center were financed 40 percent by debt, the accounting income (in BRL thousands) for the first year would be closest to:
A. 10,125.
B. 10,635.
C. 10,680.
Answer: B
“Capital Budgeting,” John D. Stowe, CFA, and Jacques R. Gagné, CFA 2009 Modular Level II, Volume 3, pp. 61-63 Study Session 8-28-h Calculate and interpret accounting income and economic income in the context of capital budgeting. The accounting income is calculated considering the cost of interest (1/2 x 30,000 x 8.5% YTM on long-term debt = 1,275) as follows:
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