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4. Assume that you have two projects (A and B) the life of the two proposals with the respective net cash flows are given below. Expected Net Cash Flows Year (1) 0 A B (110,000) (110,000) 1 71,000 11,000 2 51,000 61,000 3 21,000 81,000 Depreciation, salvage values, net working capital requirements, and tax effects are all included in these cash flows. You also have made subjective risk assessments of each Proposal and concluded that both Proposals have risk characteristics that require a return of 10%. Instruction; a. Define the term net present value (NPV). i. What is each Proposal's NPV? ii. iii. What is the rationale behind the NPV method? According to NPV, which Proposal or Proposals should be accepted if they are Independent? Mutually exclusive? Would the NPVs change if the cost of capital changed? b. Define the term internal rate of return (IRR). i. ii. What is each Proposal's IRR? What is the logic behind the IRR method? According to IRR, which Proposals should be accepted if they are independent? exclusive? Mutually Would the Proposals' IRRS change if the cost of capital changed? c. What does the profitability index (PI) measure? What are the Pl's for Proposals A and B d. What is the payback period? ii. i. Find the paybacks for Proposals A and B. What is the rationale for the payback method? According to the payback criterion, which Proposal or Proposals should be accepted if the firm's maximum acceptable payback is 2 years, and if B and A are independent? If they are mutually exclusive? e. What is the main disadvantage of discounted payback?

4. Assume that you have two projects (A and B) the life of the two proposals with the respective net cash flows are given below. Expected Net Cash Flows Year (1) 0 A B (110,000) (110,000) 1 71,000 11,000 2 51,000 61,000 3 21,000 81,000 Depreciation, salvage values, net working capital requirements, and tax effects are all included in these cash flows. You also have made subjective risk assessments of each Proposal and concluded that both Proposals have risk characteristics that require a return of 10%. Instruction; a. Define the term net present value (NPV). i. What is each Proposal's NPV? ii. iii. What is the rationale behind the NPV method? According to NPV, which Proposal or Proposals should be accepted if they are Independent? Mutually exclusive? Would the NPVs change if the cost of capital changed? b. Define the term internal rate of return (IRR). i. ii. What is each Proposal's IRR? What is the logic behind the IRR method? According to IRR, which Proposals should be accepted if they are independent? exclusive? Mutually Would the Proposals' IRRS change if the cost of capital changed? c. What does the profitability index (PI) measure? What are the Pl's for Proposals A and B d. What is the payback period? ii. i. Find the paybacks for Proposals A and B. What is the rationale for the payback method? According to the payback criterion, which Proposal or Proposals should be accepted if the firm's maximum acceptable payback is 2 years, and if B and A are independent? If they are mutually exclusive? e. What is the main disadvantage of discounted payback?

Financial And Managerial Accounting
Financial And Managerial Accounting
15th Edition
ISBN:9781337902663
Author:WARREN, Carl S.
Publisher:WARREN, Carl S.
Chapter26: Capital Investment Analysis
Section: Chapter Questions
Problem 2MAD: Assume San Lucas Corporation in MAD 26-1 assigns the following probabilities to the estimated annual...
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Assume that you have two projects (A and B) the life of the two proposals with the respective net cash flows are given below. Expected Net Cash Flows Year (t) B (110,000) (110,000) 71,000 51,000 21,000 Depreciation, salvage values, net working capital requirements, and tax effects are 1 11,000 61,000 81,000 2 3 all included in these cash flows. You also have made subjective risk assessments of each Proposal and concluded that both Proposals have risk characteristics that require a return of 10%. Instruction; a. Define the term net present value (NPV). i. What is each Proposal's NPV? What is the rationale behind the NPV method? According to NPV, which Proposal. or Proposals should be accepted if they are Independent? Mutually exclusive? Would the NPVS change if the cost of capital changed? ii. iii. b. Define the term internal rate of return (IRR). What is each Proposal's IRR? What is the logic behind the IRR method? According to IRR, which Proposals should be accepted if they are independent? exclusive? i. ii. Mutually i. Would the Proposals' IRRSS change if the cost of capital changed? c. What does the profitability index (PI) measure? What are the PI's for Proposals A and B? d. What is the payback period? i. What is the rationale for the payback method? According to the payback criterion, which Proposal or Proposals should be accepted if the firm's maximum acceptable payback is 2 years, and if B and A are independent? If they are mutually exclusive? Find the paybacks for Proposals A and B. ii. e. What is the main disadvantage of discounted payback?
Transcribed Image Text:Assume that you have two projects (A and B) the life of the two proposals with the respective net cash flows are given below. Expected Net Cash Flows Year (t) B (110,000) (110,000) 71,000 51,000 21,000 Depreciation, salvage values, net working capital requirements, and tax effects are 1 11,000 61,000 81,000 2 3 all included in these cash flows. You also have made subjective risk assessments of each Proposal and concluded that both Proposals have risk characteristics that require a return of 10%. Instruction; a. Define the term net present value (NPV). i. What is each Proposal's NPV? What is the rationale behind the NPV method? According to NPV, which Proposal. or Proposals should be accepted if they are Independent? Mutually exclusive? Would the NPVS change if the cost of capital changed? ii. iii. b. Define the term internal rate of return (IRR). What is each Proposal's IRR? What is the logic behind the IRR method? According to IRR, which Proposals should be accepted if they are independent? exclusive? i. ii. Mutually i. Would the Proposals' IRRSS change if the cost of capital changed? c. What does the profitability index (PI) measure? What are the PI's for Proposals A and B? d. What is the payback period? i. What is the rationale for the payback method? According to the payback criterion, which Proposal or Proposals should be accepted if the firm's maximum acceptable payback is 2 years, and if B and A are independent? If they are mutually exclusive? Find the paybacks for Proposals A and B. ii. e. What is the main disadvantage of discounted payback?
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