4. Which of the two alternatives would you select under the net present value? (PV factor - 10 percent) Assume a $100,000 investment and the following cash flows for two alternatives: INVESTMENT A ($) 30,000 50,000 20,000 60,000 INVESTMENT B (S) 40,000 30,000 15,000 15,000 50,000 YEAR 1 2 4

4. Which of the two alternatives would you select under the net present value? (PV factor - 10 percent) Assume a $100,000 investment and the following cash flows for two alternatives: INVESTMENT A ($) 30,000 50,000 20,000 60,000 INVESTMENT B (S) 40,000 30,000 15,000 15,000 50,000 YEAR 1 2 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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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

4. Which of the two alternatives would you
select under the net present value? (PV
factor - 10 percent)
Assume a $100,000 investment and the following cash flows for two alternatives:
INVESTMENT A ($)
30,000
50,000
20,000
60,000
INVESTMENT B (S)
40,000
30,000
15,000
15,000
50,000
YEAR
1
3
4

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Consider the following two mutually exclusive alternatives: (a) Determine the IRR on the incremental investment in the amount of$2,000.(b) If the firm's MARR is 10%, which alternative is the better choice?
is 22 percent? Future Value and Multiple Cash Flows Wells, Inc., has identified an investment project with the following cash flows. If the discount rate is 8 LO 1 3. percent, what is the future value of these cash flows in Year 4? What is the future value at an interest rate of 11 percent? At 24 percent? Year Cash Flow $ 865 1,040 1,290 1,385 1 2 3 4
Consider another set of net cash flows: Year Cash flow 0 1,000 1 1,000 2 0 3 1,500 4 2,000 5 3,500 What is the net present value of the stream if the opportunity cost of capital is 10 percent? a. What is the value of the stream at the end of year 5 if the cash flows are invested in an account that pays 10 percent annually? 2. What cash flows today (time 0), in lieu of the 1,000 cash flow, would be needed to accumulate $10,000 at the end of year 5? (Assume that the cash flows for years 1 through 5 remain the same.)
8. By taking n as 30years and using 6% both as MARR and discount rate, compare the below three possible alternatives by using NPV (net present value) and IRR methods, and recommend the best possible alternative. Types of cashflows Alternatives Alternative A Alternative B Initial capital Annual operation and ETB 40,000 Alternative C ETB 5,000,000 ETB 7,000,000 ETB 11,000,00O ЕТВ 150,000 ЕТВ 100,000 maintenance cost Annual benefit ЕТB 560,000 ЕТB 800,000 ЕТВ 1,050,000
The following are the cash flows of two projects: Year 0 1 2 3 4 Project A $ (220) 100 100 100 100 Project B $ (220) 120 120 120 What are the internal rates of return on projects A and B? Note: Enter your answers as a percent rounded to 2 decimal places. Project A B IRR % %
ok ht ences A firm evaluates all of its projects by applying the IRR rule. A project under consideration has the following cash flows: Year 0 1 2 3 Cash Flow IRR -$27,400 11,400 14,400 10,400 If the required return is 16 percent, what is the IRR for this project? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) % Should the firm accept the project? Yes O No
What is Project A’s discounted payback? Use 5 decimal places for the PV factor
What is the present value of an investment with the following cash flows? Year 1 $14,000 Year 2 $20, 000 Year 3 $30,000 Year 4. $ 43,000 Year 5. $ 57,000 Use a 7% discount rate, and round your answer to the nearest $1. a. $128, 487 b. $107, 328 c. $112, 346 d. $ 153, 272
2.
. Year End Cash Flow Alternative A Alternative B 0 -1,000 600 1 600 500 2 600 -2,000 3 600 400 4 600 200 5 -2,100 -1,000 6 700 1,386 a) Solve for the Net Present Value of the alternatives A and B using interest rates from 0% upward b) what are the rate of return of the two alternatives c) If your MARR is 8 percent, which alternatives would you select? Comment briefly on your results. What are some problems associated with the ROR method?
3
Problem 5.a: Consider the following set of projects at MARR = 30%. n 0 1 2 3 4 5 6 7 8 9 10 O A, B and E B and C A,B and D A, D and E A -$250 $60 $970 Determine what projects are simple investments? B,C and E B -$200 $90 $90 $60 $60 Net Cashflow C -$70 $20 $10 $5 -$50 $60 $50 $40 $30 $20 $10 D -$300 $270 $250 -$129 -$20 $120 $40 E -$90 -$100 -$50 $0 $150 $150 $100 $100

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