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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Question
Transcribed Image Text:1. Distinguish between payback and discounted payback period.
2. As a student of finance, what is your biggest issue with using the payback period to make investme
decisions?
3. List two (2) advantages and two (2) disadvantages of using NPV to decide between projects.
Problem 1
BioTech Industries is considering two mutually exclusive projects. The firm which has a 15% cost of
capital, has estimated its cash flows as shown in the table below.
PV Factor
15%
Years
A
B
Years
-350000
-50000
1
45000
24000
1
0.8696
65000
22000
2
0.7561
3
65000
19500
3
0.6575
4
440000
14600
4
0.5718
a) Calculate each project's discounted payback period.
b) Calculate the Net Present Value (NPV) for each project.
c) Indicate which project should be chosen and why?
d) Calculate the Internal Rate of Return (IRR) for Project B given the IRR range is between 20% - 26%.
e) Based on all the above findings, recommend the best project. Explain.
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