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Question
Submitted by stuent on Mon, 2012-04-30 22:19
due on Mon, 2012-04-30 22:27
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The Biotek Corporation has a basic cost of capital of 15 percent and is considering investing in either or both...

The Biotek Corporation has a basic cost of capital of 15 percent and is considering investing in either or both of the following projects. Project HiTek will require an investment of $453,000, while Project LoTek’s investment will be $276,000.. The following after-tax cash flows (including the investment outflow in year zero) are estimated for each project. YEAR PROJECT PROJECT

HITEK LOTEK 0 $-453,000 $-276,000 1 132,000 74,000 2 169,500 83,400 3 193,000 121,000 4 150,700 54,900 5 102,000 101,000 6 0 29,500 7 0 18,000 a) Determine the present value of the cash inflows for each project and then calculate their net present values by subtracting the appropriate dollar amount of capital investment. Which if either of the projects is acceptable? b) B. Calculate the internal rates of return for Project HiTek and Project Lotek. Which project would be preferred? c) Now assume that BioTek uses risk-adjusted discount rates to adjust for differences in risk among different investment opportunities. Biotek projects are discounted at the firm’s cost of capital of 15 percent. A risk premium of 3 percentage points is assigned to Lotek-type projects, while a 6 percentage point risk premium is used for project similar to Hitek. Determine the risk-adjusted present value of the c cash inflow for LoTek and Hitek and calculate their risk-adjusted net present values,. Should BioTek invest in either, both or neither project?

Answer
Submitted by shahimermaid on Tue, 2012-05-01 00:15
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The Biotek xxxxxxxxxxx xxx a xxxxx xxxx of capital of 15 percent xxx is considering investing xx either xx xxxx xx the following xxxxxxxxx The xxxxxxxxx after-tax cash flows (including xxx xxxxxxxxxx xxxxxxx xx xxxx xxxxx are xxxxxxxxx xxx xxxx xxxxxxxxx

xxxxxxxxxxxxxxx

xxxx

HITEK

LOTEK

0

xxxxxxxxx

xxxxxxxxx

1

132,000

74,000

2

xxxxxxx

xxxxxx

3

xxxxxxx

xxxxxxx

4

150,700

54,900

5

xxxxxxx

101,000

x

x

29,500

x

0

xxxxxx

a) Determine xxx present value of xxx xxxx inflows for each xxxxxxx xxx xxxx xxxxxxxxx their net present values by xxxxxxxxxxx xxx xxxxxxxxxxx xxxxxx amount of capital investment. Which if xxxxxx of xxx xxxxxxxx xx acceptable?

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

year

xxxxxx

xxx

xx xxxx xxxx

LOTEK

PV cash flow

0

($453,000)

x

xxxxxxxxxx

xxxxxxxxxx

xxxxxxxxxx

1

132,000

0.8696

xxxxxxxx

xxxxxx

xxxxxxxxx

2

169,500

0.7561

128158.95

xxxxxx

63058.74

x

193,000

xxxxxx

$126,898

xxxxxxx

$79,558

x

150,700

0.5718

xxxxxxxx

54,900

xxxxxxxxx

x

xxxxxxx

0.4972

xxxxxxx

xxxxxxx

xxxxxxx

6

x

0.4323

xx

xxxxxx

xxxxxxx

x

0

xxxxxx

0

18,000

x

 

 

 

$53,728

 

xxxxxxx

xxxx the xxxxxxxx have a xxxxxxxx NPV but Lotek xxx a xxxxxx positive xxxxx so, xx xxxxxx xx xxxxxxxx xxxx Hitech

b) B. xxxxxxxxx xxx xxxxxxxx rates of return xxx Project xxxxx and Project Lotek. Which xxxxxxx xxxxx xx xxxxxxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxx

year

hitech

xxx

xx xxxx flow

x

($453,000)

x

($453,000)

1

132,000

xxxxxxxx

xxxxxx

x

169,500

0.694444

xxxxxxxxxxx

3

xxxxxxx

0.578704

xxxxxxxx

4

xxxxxxx

xxxxxxxx

xxxxxxxxxxx

x

102,000

xxxxxxxx

40991.51235

6

0

xxxxxxxx

$0

7

0

xxxxxxxx

x

 

 

 

$65

xxxxx excel Function xxx xxx xxxxx is xxx xxx Lotek xx 19%.

xx Now xxxxxx that xxxxxx xxxx risk-adjusted discount xxxxx to xxxxxx for differences in risk among different xxxxxxxxxx opportunities. xxxxxx xxxxxxxx xxx discounted xx xxx xxxx’s cost xx capital of xx percent. x xxxx premium xx x percentage points xx xxxxxxxx xx Lotek-type

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