FIN MOD6 DIS
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FIN MOD6 DIS
As the
financial manager
choosing between two projects
can be difficult. It is my responsibility
to increase the value of the firm. I must
take several factors into account, such as the
Net Present Value (NPV), Internal Rate of Return (IRR), Payback period, and the initial investment.
Let's examine Project Alpha and Project Beta
in greater detail and choose the best project to invest in
Project Alpha has an NPV of $35,270 and an IRR of 10.4%. Project Beta has a lower NPV of $1,780 but a higher IRR of 12.2%. Project Beta also has a shorter payback period of 2 years compared to Project Alpha's 6 years. Project Alpha requires a higher initial investment of $65,000 compared to Project Beta's $32,000.
The projects are mutually exclusive, meaning the financial manager can only choose one, and I believe the best choice depends on the company's priorities. I do not think there is a clear best option, but I would choose Project Alpha. Although Project Beta provides a larger IRR and faster
payback, it falls short in terms of NPV, an important metric for creating long-term value. With a greater NPV, Project Alpha is expected to provide a bigger contribution to the company's value during its entire life. “
If projects are mutually exclusive, the project with the largest NPV is undertaken, as long as it is more than $0” (Zutter & Smart, 2021). However, there are some circumstances in which Project Beta may be selected. Project Beta may
be the best option if the company has limited resources and prefers short-term cash flow. Also, Project Beta provides a quicker return on investment because of its quicker payback period and higher IRR. Project Alpha's larger NPV makes it the ideal choice for maximizing the company's long-term worth. Project Beta might be considered when short-term profits or risk reduction are prioritized.
Hello Danelle, It is difficult to disregard Project Beta's tempting payback period and the higher Internal Rate of Return (IRR) into account when comparing Project Alpha and Project Beta. However, due to its significantly greater NPV, Project Alpha, in my opinion, is the better option.
We need to consider the bigger picture. While it may take longer to recoup the initial investment compared to Project Beta, the financial outcome will likely be better in the long term.
Net Present Value (NPV) is an important metric that considers the time value of money while discounting cash flows over the course of the project to their present value. The NPV of Project Alpha here vastly outweighs that of Project Beta. This suggests that over time, Project Alpha will
add more to the company's overall value. “
If projects are mutually exclusive, the project with the largest NPV is undertaken, as long as it is more than $0” (Zutter & Smart, 2021).
Despite the alluring factors of Project Beta like the shorter payback period and the better IRR, I firmly believe that Project Alpha is the better project to invest in. References
Zutter, C., & Smart, S. (2021). Principles of managerial finance
(16th ed.). Pearson.
________________________________________________________________
I agree with you Jameeka that Project Alpha seems to be the better choice based on the net present value (NPV). The NPV for Project Alpha is $35,000, which is significantly higher compared to the NPV of Project Beta, which is $1,780.
Additionally, the internal rate of return (IRR) for Project Alpha is 10.4% over a period of 6 years, indicating a favorable return on the initial investment. This suggests that Project Alpha has
the potential for long-term profitability.
On the other hand, Project Beta has a higher IRR of 12.2% over a shorter period of 2 years. This indicates strong project margins and a quicker return on investment.
Given these factors, Project Alpha seems to be a superior option if the goal is to build a long-
term investment without a rigid time constraint for return because of its greater NPV and positive
IRR.
Good post Jameeka, have a great day.
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Related Questions
Suppose that your organization is deciding which of four projects to bid on, as summarized in the following table. Assume that all up-front investments are not recovered, so they are shown as negative profits. Draw a diagram and calculate the EMV for each project. Write a few paragraphs explaining which projects you would bid on. Be sure to use the EMV information and your personal risk tolerance to justify your answer.
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You are the investment manager of an appliance company. The industry is currently in the expansion
face and the CEO would like to capture as much of the market share as possible. You asked your
analysts to submit project proposals as summarized below.
Project
Discount Rate
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Annual Cash Flow Project Life (Years)
10
3M
1M
5
12
4M
1M
8
8
5M
2M
4
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3M
1.5M
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1M
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Which projects should the manager choose? If you were given unlimited capital, which projects should
be implemented?
ABCDE
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What Suppose your organization is deciding which of four projects to bid on. Information on each is in the table below. Assume that all up-front investments are not recovered, so they are shown as negative profits. Draw a diagram and calculate the EMV for each project. Write a few paragraphs explaining which projects you would bid on. Be sure to use the EMV information and your personal risk tolerance to justify your answer
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use excel
9. A firm faces three investment opportunities A, B and C:
A. NPV = $3m, investment = $1m
B. NPV = $2m, investment = $2m
C. NPV = $2.5m, investment = $3m
Given a total of $4m initial resources, which one(s) should the firm take? Explain.
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[EXCEL] Payback: Refer to Problem 5. What are the payback periods for production systems 1 and 2? If the systems are mutually exclusive and the firm always chooses projects with the lowest payback period, in which system should the firm invest? please use excel.
Problem 5 info:
5. [EXCEL] Net present value: Blanda Incorporated management is considering investing in two alternative production systems. The systems are mutually exclusive, and the cost of the new equipment and the resulting cash flows are shown in the accompanying table. If the firm uses a 9 percent discount rate for production system projects, in which system should the firm invest?
Year System 1 System 2
0 −$15,000 −$45,000
1 15,000 32,000
2 15,000 32,000
3 15,000 32,000
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Compute the Profitability Index (PI) for each project?
Project A
Project B
Profitability Index (PI)
5- In light of your answers above, suppose that these two projects might be mutually exclusive or independent. According to these two assumptions, fill in the blanks in the table below with the suitable answer:
Points
Investment Criteria
If A and B are mutually exclusive, then I would select
If A and B are independent, then I would select
PBP
NPV
IRR
PI
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8. NPV profiles
An NPV profile plots a project's NPV at various costs of capital. An example NPV profile is shown below:
Identify the range of costs of capital that a firm would use to accept and reject this project, and answer the questions that follow.
NPV (Dollars)
600
500
400
300
200
100
0 ←
-100
-200
-300
A
2
4 6
8 10 12 14 16
DISCOUNT (REQUIRED) RATE (Percent)
The project represented by triangle A should be
B
18 20
This NPV profile demonstrates that as the cost of capital increases, the project's NPV
?
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Suppose that you could invest in the following projects but have only $29,700 to invest. How would you make your decision and in
which projects would you invest?
Project Cost
A
$7,850
B
C
D
11,060
9,200
6,540
NPV
$3,200
6,460
4,150
3,090
You should invest in project(s)
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1. The president of the Martin Company is considering two alternative invest-
ments, X and Y. If each investment is carried out, there are four possible
outcomes. The present value of net profit and probability of each outcome
follow:
Investment X
Investment Y
Net Present
Net Present
Outcome
Value
Probability Outcome
Value
$12 million
Probability
0.1
$20 million
0.2
A
8 million
10 million
2
0.3
B
9 million
0.3
3
0.4
6 million
0.1
3 million
0.1
D
11 million
0.5
a. What are the expected present value, standard deviation, and coefficient
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b. What are the expected present value, standard deviation, and coefficient
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c. Which investment is riskier?
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which projects would you invest?
Project
Cost
NPV
A
$8,260
$4,300
BCD
10,850
6,470
9,070
4,830
7,170
3,940
You should invest in project(s)
E
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The manager of a small firm wants to know which among the three different projects should the company enter into. Details of the three projects are as follows:
JOJO
GINA
MARIA
LORINDA
KANOR
Initial investment
P 120,000
P 125,000
P 180,000
P160,000
P35,000
Net present value
25,000
24,000
45,000
35,000
10,000
Internal rate of return
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15%
12%
8%
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Profitability index
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If the management has a budget of P500,000 only, which projects would be undertaken?
a. Jojo, Gina, Lorinda, and Kanor
b. Gina, Maria, Lorinda, and Kanor
c. Jojo, Maria, Lorinda, and Kanor
d. Jojo, Gina, Maria, and Kanor
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Year 0:
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-21700
Year 1:
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11200
Year 2:
37600
11200
Year 3:
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11200
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If the company applies the NPV decision rule, which project should it take?
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Making the accept or reject decision
Hungry Whale Electronics's decision to accept or reject project Alpha is independent of its decisions on other projects. If the firm follows the NPV
method, it should
project Alpha.
Which of the following statements best explains what it means when a project has an NPV of $0?
O When a project has an NPV of $0, the project is earning a rate of return less than the project's weighted average cost of capital. It's OK to
accept the project, as long as the project's profit is positive.
O When a project has an NPV of $0, the project is earning a rate of return equal to the project's weighted average cost of capital. It's OK to
accept a project with an NPV of $0, because the project is earning the required minimum rate of return.
O When a project has an NPV of $0, the project is earning a profit of $0. A firm should reject any project with an NPV of $0, because the
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difference). do not use % sign in your answer
n
0
1
2
Net Cash Flow
Project A1
- $4,000
2,600
2,800
Project A2
- $5,000
3,600
3,200
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the range of costs (ranges labeled "A" and "B") of capital that a firm would use to accept and reject this project.
A
B
NPV (Dollars)
400
300
200
100
0
-100
-200
A
0 2 4 6 8 10
10
12 14 16 18 20
COST OF CAPITAL (Percent)
True
B
True or False: The NPV and IRR methods can lead to conflicting decisions for mutually exclusive projects.
False
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A firm is considering the following independent projects.
Project
Investment
Present value offuture cash flows
NPV
A
$130
$176
$46
B
$103
$115
$12
C
$183
$287
$104
D
$161
$199
$38
E
$184
$273
$89
What is the Profitability Index of Project B?
Question 5Answer
a.
0.85
b.
1.12
c.
0.89
d.
1.18
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Alt
3. Both companies are considering an investment in Project One, Project
Two, and Project Three. All three projects carry an average amount of risk
for each company. Both companies use Payback, NPV and IRR to make
investment decisions. The cash flows for both projects are shown below.
a. Based on NPV, What projects would Apt be likely to invest in?
b. Based on IRR, what projects woutd Heart be tikety to invest in?
c. Which project has the fastest payback? Why might that be
important to the investment decision?
d. If money had no time value, which project would be the best
decision?
Project One: $10 million initial investment and $2million of free cash flow
at the end of each year for 15 years.
Project Two: $5 million initial investment. Free cash flows for 5 years :
Yr. 1 = $3 million, Yr. 2 = $1.5 million, Yrs. 3-5 = 0.5 million
Project Three: Initial investment of $20 million. One Free Cash flow of $40
million in 8 years. No other Free Cash Flows.
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Exercise #3: Decision Trees and Expected Monetary
Value (EMV)
Question 1: Which project you will choose based on EMV
estimation? Why? (Show your calculations)
Project Chance Gain or Loss Use for calculations
Project A 30%
Lose 30,000.
40%
Gain 55,000.
30%
Lose 15,000.
Project B 75%
Gain 55,000
25%
Lose 150,000.
Project C 40%
Gain 50,000.
60%
Lose 20,000.
The best project is:
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5. NPV profiles
An NPV profile plots a project's NPV at various costs of capital, labeled "A" and "B" in the graph. A project's NPV profile is shown as follows. Identify
the range of costs (ranges labeled "A" and "B") of capital that a firm would use to accept and reject this project.
A
B
NPV (Dollars)
400
300
200
100
0
-100
-200
0
2
A
B
4 6 8 10 12 14 16 18 20
COST OF CAPITAL (Percent)
The point at which the NPV profile intersects the horizontal axis represents the
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1.What is the project’s net present value?
2. What is the project’s internal rate of return to the nearest whole percent?
3. What is the project’s simple rate of return?
4-a. Would the company want Casey to pursue this investment opportunity?
4-b. Would Casey be inclined to pursue this investment opportunity?
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- Compute the Profitability Index (PI) for each project? Project A Project B Profitability Index (PI) 5- In light of your answers above, suppose that these two projects might be mutually exclusive or independent. According to these two assumptions, fill in the blanks in the table below with the suitable answer: Points Investment Criteria If A and B are mutually exclusive, then I would select If A and B are independent, then I would select PBP NPV IRR PIarrow_forward8. NPV profiles An NPV profile plots a project's NPV at various costs of capital. An example NPV profile is shown below: Identify the range of costs of capital that a firm would use to accept and reject this project, and answer the questions that follow. NPV (Dollars) 600 500 400 300 200 100 0 ← -100 -200 -300 A 2 4 6 8 10 12 14 16 DISCOUNT (REQUIRED) RATE (Percent) The project represented by triangle A should be B 18 20 This NPV profile demonstrates that as the cost of capital increases, the project's NPV ?arrow_forwardSuppose that you could invest in the following projects but have only $29,700 to invest. How would you make your decision and in which projects would you invest? Project Cost A $7,850 B C D 11,060 9,200 6,540 NPV $3,200 6,460 4,150 3,090 You should invest in project(s)arrow_forward
- i need the answer quicklyarrow_forward1. The president of the Martin Company is considering two alternative invest- ments, X and Y. If each investment is carried out, there are four possible outcomes. The present value of net profit and probability of each outcome follow: Investment X Investment Y Net Present Net Present Outcome Value Probability Outcome Value $12 million Probability 0.1 $20 million 0.2 A 8 million 10 million 2 0.3 B 9 million 0.3 3 0.4 6 million 0.1 3 million 0.1 D 11 million 0.5 a. What are the expected present value, standard deviation, and coefficient of variation of investment X? b. What are the expected present value, standard deviation, and coefficient of variation of investment Y? c. Which investment is riskier? d. The president of the Martin Company has the utility functionarrow_forwardSuppose that you could invest in the following projects but have only $29,670 to invest. How would you make your decision and in which projects would you invest? Project Cost NPV A $8,260 $4,300 BCD 10,850 6,470 9,070 4,830 7,170 3,940 You should invest in project(s) Earrow_forward
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