1. A firm is considering three mutually exclusive expansion projects. Their initial cost is the same for the three of them in a value of €12,000, and the minimum required rate of return for the firm is 10%. The excpected cash flows for each project are: Years Project A Project B Project C 3 €6,500 5 1 4 €6,500 €4,000 €6,500 €4,000 €4,000 €4,000 €4,000 a) Which of the investments will the firm choose using: > Payback method > NPV IRR b) Would your response change if the firm's funds are unlimited? Explain.

1. A firm is considering three mutually exclusive expansion projects. Their initial cost is the same for the three of them in a value of €12,000, and the minimum required rate of return for the firm is 10%. The excpected cash flows for each project are: Years Project A Project B Project C 3 €6,500 5 1 4 €6,500 €4,000 €6,500 €4,000 €4,000 €4,000 €4,000 a) Which of the investments will the firm choose using: > Payback method > NPV IRR b) Would your response change if the firm's funds are unlimited? Explain.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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M& B is considering investing in Project X which requires an initial investment of P15,000. The firm`s cost of capital is 9%. The project is expected to last for six years and provide an annual cash flow of P3,000. What is this projects breakeven cash flow? A. P3,434.00 B. P3,334.00 C. P3,344.00
An investment project that gives cash flow for the first year $ 10,000 and the second $ 15,000; The interest rate is 8.5%; The present value of the investment is equal to (to the nearest decimal place): Select one: a. $ 25,000 b. $ 21929 c. $ 30,000 d. $ 20,000
1. What is the profitability index of a project that costs $90,000 and returns $30,000 annually for 8 years if the opportunity cost of capital is 9.6%? a.0.64 b.0.80 c.1.76 d.1.05 e.1.26 2. King Corporation is planning a 15-year project with an initial investment of $2,013,000. The project will have $563,000 cash inflows per year in years 1-2; $166,000 cash inflows in years 3-10, and $57,000 cash inflows in years 11-15. Determine the project's internal rate of return (IRR). Using financial calculator a.6.87% b.5.72% c.4.58% d.10.30% e.8.24%
Economics
A project is expected to generate a cash flow of £250 at the end of each of three consecutive years, as illustrated below: End of year 1 2 3 Cash flow £250 £250 £250 The project manager uses a discount rate of 10% to evaluate the project. Which of the following statements is/are incorrect? a. Economic capital at the start of year 1 (K0) equals £621.7 (rounded to one decimal). b. If all cash flows were distributed when received (i.e. if payout was 100%), economic income in year 2 (Y2) would equal £62.2 (rounded to one decimal). c. If the project manager did not distribute any of the project cash flows (i.e. if payout was 0%), the project’s economic capital would not depreciate during year 1. d. If the project manager distributed all of the project cash flows (i.e. if payout was 100%), the project’s economic capital would depreciate over time.
13. The IBC Company is considering undertaking an investment that promises to have the following cash flows Period 0 is = -$100 Period 1 is= $150 Period 2 is = $50 Period 3 is = $50 If it waits a year, it can invest in an alternative (that is, mutually exclusive) investment that promises to pay Period 1 Period 2 Period 3 −$150 $250 $50 Assume a time value of money of 0.05. Which investment should the firm undertake? Use the present value method and the internal rate of return approaches. With the IRR approach, use the incremental cash flows.
Investapp Ltd is considering whether to undertake one of two mutually exclusive projects, each of which would require the purchase of an asset costing £50,000, which would have a zero scrap value at the end of four years. Cost of capital is estimated at 10%. The cash flows associated with the two projects are as follows: Project X £ Project Y £ Initial investment 50,000 50,000 Net cash inflows: Year 1 40,000 30,000 20,000 20,000 30,000 20,000 30,000 30,000 Year 2 Year 3 Year 4 Discount factors @ 10% Rate 10% Year 1.000 1 0.909 2 0.826 3 0.751 4 0.683
A company is considering two mutually exclusive investments with a discount rate of 10%.The cash flows of the projects over time follows: Time Project A Project B 0 - RM300,000 - RM405,000 1 - RM387,000 RM134,000 2 - RM193,000 RM134,000 3 - RM100,000 RM134,000 4 RM600,000 RM134,000 5 RM600,000 RM134,000 6 RM850,000 RM134,000 7 - RM180,000 RM0 Net Present value given : Time Project A Project B Project A Project B 0 -300,000 -405,000 1.0000 (300,000.00) (405,000.00) 1 -387,000 134,000 0.9091 (351,818.18) 121,818.18 2 -193,000 134,000 0.8264 (159,504.13) 110,743.80 3 -100,000 134,000 0.7513 (75,131.48) 100,676.18 4 600,000 134,000 0.6830 409,808.07 91,523.80 5 600,000 134,000 0.6209 372,552.79 83,203.46 6 850,000 134,000 0.5645 479,802.84 75,639.51 7 -180,000 0 0.5132…
4. Capital expenditure of a new investment project is $ 120,000,000; the expected annual net cash flows generated from the investment are given below. Suppose that the company's cost of capital is 10%, calculate and comment on the accounting rate of return, internal rate of return, and discounted payback period of the project. Years Cash flows($000) DF (10%) 1 40,000 0.909 2 42,000 0.826 3 50,000 0.751 4 52,000 0.683 5 55,000 0.621 SV 60,000 0.565
Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 (434,000) (44,500) 1 $39,500 $21,300 2 $66,500 $12,400 3 $83,500 $23,100 4 $549,000 $19,900 The re quired return on these investments is 11 percent. a. What is the payback period for each project? Note: Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16. b. What is the NPV for each project? Note: Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16. c. What is the IRR for each project? Note: Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. d. What is the profitability index for each project? Note: Do not round intermediate calculations and round your answers to 3 decimal places, e.g., 32.161. e. Based on your answers in (a) through (d), which project will you finally choose?
12
Two mutually exclusive investment opportunities require an initial investment of $8 million Investment A then generates $1.70 million per year in perpetuity, while investment B pays $1.00 million in the first y with cash flows increasing by 5% per year after that. At what cost of capital would an investor regard both opportunities as being equivalent? O A. 13% OB. 12% OC. 6% OD. 3%

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