4 2. Calculating Payback An investment project provides cash inflows of $865 per year for eight years. What is the project payback period if the initial cost is $3,100? What if the initial cost is $4,300? What if it is $7.900? 3. Calculating Payback Stenson, Inc., imposes a payback cutoff of three years for its international investment projects. If the company has the following LO 1 LO 1 two projects available, should it accept either of them? Cash Flow (B) Cash Flow (A) Year -$125,000 -$75,000 29,000 33,000 1 32,000 36,000 35,000 19,000 3 240,000 9,000 4. Calculating AAR You're trying to determine whether or not to expand your business by building a new manufacturing plant. The plant has an installation cost of $10.8 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of $1,293,000, $1,725,000, $1,548,000, and $1,310,000 over these four years, what is the project's average accounting return (AAR)? LO 2 5. Calculating IRR A firm evaluates all of its projects by applying the IRR rule. If the required return is 11 percent, should the firm accept the following project? LO 3 Year Cash Flow -$157,300 1 74,000 2 87,000 3 46,000 6. Calculating NPV For the cash flows in the previous problem, suppose the firm uses the NPV decision rule. At a required return of 9 percent, should the firm accept this project? What if the required return was 21 percent? LO 4
4 2. Calculating Payback An investment project provides cash inflows of $865 per year for eight years. What is the project payback period if the initial cost is $3,100? What if the initial cost is $4,300? What if it is $7.900? 3. Calculating Payback Stenson, Inc., imposes a payback cutoff of three years for its international investment projects. If the company has the following LO 1 LO 1 two projects available, should it accept either of them? Cash Flow (B) Cash Flow (A) Year -$125,000 -$75,000 29,000 33,000 1 32,000 36,000 35,000 19,000 3 240,000 9,000 4. Calculating AAR You're trying to determine whether or not to expand your business by building a new manufacturing plant. The plant has an installation cost of $10.8 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of $1,293,000, $1,725,000, $1,548,000, and $1,310,000 over these four years, what is the project's average accounting return (AAR)? LO 2 5. Calculating IRR A firm evaluates all of its projects by applying the IRR rule. If the required return is 11 percent, should the firm accept the following project? LO 3 Year Cash Flow -$157,300 1 74,000 2 87,000 3 46,000 6. Calculating NPV For the cash flows in the previous problem, suppose the firm uses the NPV decision rule. At a required return of 9 percent, should the firm accept this project? What if the required return was 21 percent? LO 4
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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Number 5 and 6
Transcribed Image Text:4
2. Calculating Payback An investment project provides cash inflows of $865
per year for eight years. What is the project payback period if the initial cost
is $3,100? What if the initial cost is $4,300? What if it is $7.900?
3. Calculating Payback Stenson, Inc., imposes a payback cutoff of three years
for its international investment projects. If the company has the following
LO 1
LO 1
two projects available, should it accept either of them?
Cash Flow (B)
Cash Flow (A)
Year
-$125,000
-$75,000
29,000
33,000
1
32,000
36,000
35,000
19,000
3
240,000
9,000
4. Calculating AAR You're trying to determine whether or not to expand your
business by building a new manufacturing plant. The plant has an installation
cost of $10.8 million, which will be depreciated straight-line to zero over
its four-year life. If the plant has projected net income of $1,293,000,
$1,725,000, $1,548,000, and $1,310,000 over these four years, what is the
project's average accounting return (AAR)?
LO 2
5. Calculating IRR A firm evaluates all of its projects by applying the IRR rule.
If the required return is 11 percent, should the firm accept the following project?
LO 3
Year
Cash Flow
-$157,300
1
74,000
2
87,000
3
46,000
6. Calculating NPV For the cash flows in the previous problem, suppose the
firm uses the NPV decision rule. At a required return of 9 percent, should
the firm accept this project? What if the required return was 21 percent?
LO 4
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