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
#5 is the question
![**Capital Budgeting: Problems**
**Investment Table:**
| Investment | Period | | 0 | 1 | 2 | 3 | 4 | 5 |
|------------|--------|---|---|-----|-----|-----|-----|------|
| A | | | -$1,000 | $100 | $100 | $100 | $100 | $1,100 |
| B | | | -$1,000 | 264 | 264 | 264 | 264 | 264 |
| C | | | -$1,000 | | | | | 1,611 |
**Problems:**
1. Compute the net present value for each of the following cash flow sequences. Assume a cost of money of 10 percent.
2. Compute the internal rate of return for each of the cash flows in problem 1.
3. Compute the payback for each of the cash flows in problem 1. If the maximum acceptable payback period is four years, which (if any) of the cash flows would be accepted as a desirable investment?
4. Assume a cost of money of 5 percent. Compute the net present values of the cash flows of problem 1.
5. Assume a cost of money of 15 percent. Compute the net present values of the cash flows of problem 1. Compare with the results obtained from problems 1 and 4.
6. The Arrow Company is considering the purchase of equipment that will return cash flows as follows:
| End of Period | Cash Flows |
|---------------|------------|
| 1 | $5,000 |
| 2 | 3,000 |
| 3 | 2,000 |
| 4 | 1,000 |
| 5 | 500 |
- Assume a cost of money of 10 percent. What is the maximum amount the company could pay for the machine and still be financially no worse off than if it did not buy the machine?
7. An investment with an internal rate of return of 0.25 has the following cash flows: [Details not provided in the image]](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F2e222fd9-b0fd-41ee-8b93-d77607107c6a%2F68c3396c-fee9-41dd-93ae-c7d30404ef70%2F65a4kpy7_processed.png&w=3840&q=75)
Transcribed Image Text:**Capital Budgeting: Problems**
**Investment Table:**
| Investment | Period | | 0 | 1 | 2 | 3 | 4 | 5 |
|------------|--------|---|---|-----|-----|-----|-----|------|
| A | | | -$1,000 | $100 | $100 | $100 | $100 | $1,100 |
| B | | | -$1,000 | 264 | 264 | 264 | 264 | 264 |
| C | | | -$1,000 | | | | | 1,611 |
**Problems:**
1. Compute the net present value for each of the following cash flow sequences. Assume a cost of money of 10 percent.
2. Compute the internal rate of return for each of the cash flows in problem 1.
3. Compute the payback for each of the cash flows in problem 1. If the maximum acceptable payback period is four years, which (if any) of the cash flows would be accepted as a desirable investment?
4. Assume a cost of money of 5 percent. Compute the net present values of the cash flows of problem 1.
5. Assume a cost of money of 15 percent. Compute the net present values of the cash flows of problem 1. Compare with the results obtained from problems 1 and 4.
6. The Arrow Company is considering the purchase of equipment that will return cash flows as follows:
| End of Period | Cash Flows |
|---------------|------------|
| 1 | $5,000 |
| 2 | 3,000 |
| 3 | 2,000 |
| 4 | 1,000 |
| 5 | 500 |
- Assume a cost of money of 10 percent. What is the maximum amount the company could pay for the machine and still be financially no worse off than if it did not buy the machine?
7. An investment with an internal rate of return of 0.25 has the following cash flows: [Details not provided in the image]
Expert Solution
Step 1
Net Present Value (NPV) shows net present worth of project which is surplus of PV of all cash inflows over PV of all cash outflows. It is capital budgeting tool applied to make decision and selection among various alternatives for long term investments.
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