None 5.15.2Apply the net present value (NPV) capital budgeting technique to determine the NPVSfor the two drill presses.(13)Recommend to Global's management which one of the two drill presses should beconsidered as the replacement and substantiateyour decision.(5)

Question 5.1: Applying Net Present Value (NPV) for the Two Drill PressesObjective: The goal here is…

Answered: 5.1 5.2 Apply the net present value…

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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From the problem below :1. For capital budgeting purposes, what is the net investment in the new, high-performing machine?A. P186,400B. P185,000C. P169,600D. P148,000 2. What is the payback period?A. 4.49 yearsB. 5.24 yearsC. 5.76 yearsD. None from the choices 3. Compute the new, high-performing machine's net present value.A. P1,200B. P15,892C. P28,025D. P6,729
2. Match each of the following terms with the appropriate definition. The time expected to recover the cash initially invested in a project. A minimum acceptable rate of return on a potential investment. 1. Discounting A return on investment which results in a zero net present value. 2. Net Present Value A comparison of the cost of 3. Capital Budgeting an investment to its projected cash flows at a single point in time. 4. Accounting Rate of Return 5. Net Cash Flow A capital budgeting method focused on the rate of return on a project's average investment. 6. Internal Rate of Return 7. Payback Period The process of restating future cash flows in terms 8. Hurdle Rate of present time value. Cash inflows minus cash outflows for the period. A process of analyzing alternative long-term investments. >
Which of the statements below is TRUE regarding capital budgeting? O A. Capital budgeting deals with how much to apportion spending on current assets. O B. Projects with NPVS greater than the IRR should be accepted. OC. We can find a project's NPV by simply taking the product of all of the project's undiscounted cash flows. O D. Ceteris paribus, a lower cost of capital would increase a project's NPV.
Financial assets management decision-making often involves determination of the Present Value (PV) of the flow of money over time. If a monetary PV is given by: PV = Gt/(1+m)t (i) Identify and explain each of the variables: G, m, and t. (ii) Explain how an increase in m would impact the PV of this financial asset. (iii) Find how much would be required to generate a PV of 890, over a 5 years period, at a constant annual interest rate of 4 percent.
6.20 The cash flows for two investment projects are as given in Table P6.20. (a) For project A, find the value of X that makes the equivalent annual receipts equal the equivalent annual disbursement at i = (b) For A to be preferred over project B, determine the minimum acceptable value of X in year 2 at i 15%. 12% based on an AE criterion. TABLE P6.20 Project's Cash Flow B 01 -$4,500 $6,500 $1,000 -$1,400 2 -$1,400 3 $1,000 -$1,400 $1,000 -%$1,400
8. Conclusions about capital budgeting The decision process Before making capital budgeting decisions, finance professionals often generate, review, analyze, select, and implement long-term investment proposals that meet firm-specific criteria and are consistent with the firm's strategic goals. Companies often use several methods to evaluate the project's cash flows and each of them has its benefits and disadvantages. Based on your understanding of the capital budgeting evaluation methods, which of the following conclusions about capital budgeting are valid? Check all that apply. The NPV shows how much value the company is creating for its shareholders. For most firms, the reinvestment rate assumption in the MIRR is more realistic than the assumption in the IRR. Managers have been slow to adopt the IRR, because percentage returns are a harder concept for them to grasp. is the single best method to use when making capital budgeting decisions.
7. The NPV and payback period What information does the payback period provide? Suppose you are evaluating a project with the expected future cash inflows shown in the following table. Your boss has asked you to calculate the project's net present value (NPV). You don't know the project's initial cost, but you do know the project's regular, or conventional, payback period is 2.50 years. Year Year 1 Year 2 Year 3 Year 4 Cash Flow $350,000 $450,000 $400,000 $425,000 If the project's weighted average cost of capital (WACC) is 8%, the project's NPV (rounded to the nearest dollar) is: O $305,817 O $339,797 O $322,807 O $288,827 Which of the following statements indicate a disadvantage of using the regular payback period (not the discounted payback period) for capital budgeting decisions? Check all that apply. The payback period does not take the project's entire life into account. The payback period does not take the time value of money into account. The payback period is calculated using…
8. Conclusions about capital budgeting The decision process Before making capital budgeting decisions, finance professionals often generate, review, analyze, select, and implement long-term investment proposals that meet firm-specific criteria and are consistent with the firm’s strategic goals. Companies often use several methods to evaluate the project’s cash flows and each of them has its benefits and disadvantages. Based on your understanding of the capital budgeting evaluation methods, which of the following conclusions about capital budgeting are valid? Check all that apply. The NPV shows how much value the company is creating for its shareholders. Managers have been slow to adopt the IRR, because percentage returns are a harder concept for them to grasp. For most firms, the reinvestment rate assumption in the MIRR is more realistic than the assumption in the IRR. True or False: Sophisticated firms use only the NPV method in capital budgeting…
4. Consider the two projects depicted in Table 2: The net present value (NPV) of project A is ________ TABLE 2 Project Year 0 Year 1 Year 2 Year 3 Year 4 Discount Cash Flow Cash Flow Cash Flow Cash Flow. Cash Flow. Rate A. -100. 40. 70 60 0. 0.11 B -80 50 30 30 30 0.11 5 Consider the two projects depicted in Table 2: The net present value (NPV) of project B is ________.
8.6 letters a b and c
Question 4: Capital Budgeting a). Consider the following two mutually exclusive projects: YEAR 0 CASH FLOW (A) -$300,000 1 20,000 2 70,000 3 80,000 4 400,000 CASH FLOW (B) -$39,000 18,000 12,000 18,000 19,000 Whichever project you choose, if any, you require a 15 percent return on your investment. (i) If you apply the payback period (PBP) criterion, which investment will you choose? Why? (ii) If you apply the net present value (NPV) criterion, which investment will you choose? Why? (iii)If you apply the profitability index (PI) criterion, which investment will you choose? Why? (iv) If you apply the internal rate of return (IRR) criterion, which investment will you choose? Why? (v) Based on your answers in (i) through (iv), which project will you finally choose? Why? Examiner: Prof. Ebenezer Bugri Anarfo Page 9 b). You are trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of $15 million, which will be…
Consider the following two sets of project cash flows:Project Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6DiscountRateX -903 175.6 169.8 201.4 251.5 299.2 305.2 0.1037Y -513 190.5 195.5 90.5 80.5 85.5 110.5 0.1037A) Assume that projects X and Y are mutually exclusive. The correct investment decision andthe best rational for that decision is to:i) invest in Project Y since IRRY > IRRX.ii) invest in Project Y since NPVY > NPVX.iii) neither of the above.B) What are the incremental IRR and NPV of Project X?C) Is the use of the incremental measures in B) appropriate to your evaluation of thepreferred project? Explain.D) Which is the preferred project? Explain and justify the basis for your choice.(6 marks)2) Due to the demands of the new ATO Single Tough Reporting System, a successful manufacturingcompany is assessing the introduction of a new computer system to improve regulatory reportingcompliance. The managing director wants to install a new Pay Perfect system, whereas the…

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5.1 5.2 Apply the net present value (NPV) capital budgeting technique to determine the NPVS for the two drill presses. (13) Recommend to Global's management which one of the two drill presses should be considered as the replacement and substantiate your decision. (5)