5a. EQ: Internal rate of return = the rate that equates inflows with outflows 5b. Rule: Accept the project if the IRR > the required return. 5c. EX: Reevaluate the project in "1c" using the IRR method and a 10% required return: IRR 9.70% REJECT 5d. Problem: Reevaluate the project in "3c" using the IRR method and an 11% required return. 6a. EQ: Modified IRR = [(FV of inflows) / Cost]/n - 1 6b. Rule: Accept the project if the MIRR > the required return. 6c. EX: Reevaluate the project in "1c" using the MIRR method, a 3% re-interest rate and a 10% required MIRR= [($10,000 x 3.0909) / $25,000] 1/3-1 = 0.0733 or 7.33% REJECT rate. 6d. Problem: Evaluate a project costing $100,000 and returning $25,000 annually for five years using the MIRR method, a 4% re-interest rate and a 9% required return. 7a. EQ: Profitability index = PV of the inflows / Cost 7b. Rule: Accept the project if the PI > 1. 7c. EX: Evaluate a project costing $25,000 and returning $10,000 annually for years 1-3 using the PI method and a 10% discount rate. PI = $24,869 / $25,000 = 0.9947 REJECT 7d. Problem: Evaluate a project costing $15,000 and returning $3000 annually for 10 years using the PI method and a 13% discount rate.
5a. EQ: Internal rate of return = the rate that equates inflows with outflows 5b. Rule: Accept the project if the IRR > the required return. 5c. EX: Reevaluate the project in "1c" using the IRR method and a 10% required return: IRR 9.70% REJECT 5d. Problem: Reevaluate the project in "3c" using the IRR method and an 11% required return. 6a. EQ: Modified IRR = [(FV of inflows) / Cost]/n - 1 6b. Rule: Accept the project if the MIRR > the required return. 6c. EX: Reevaluate the project in "1c" using the MIRR method, a 3% re-interest rate and a 10% required MIRR= [($10,000 x 3.0909) / $25,000] 1/3-1 = 0.0733 or 7.33% REJECT rate. 6d. Problem: Evaluate a project costing $100,000 and returning $25,000 annually for five years using the MIRR method, a 4% re-interest rate and a 9% required return. 7a. EQ: Profitability index = PV of the inflows / Cost 7b. Rule: Accept the project if the PI > 1. 7c. EX: Evaluate a project costing $25,000 and returning $10,000 annually for years 1-3 using the PI method and a 10% discount rate. PI = $24,869 / $25,000 = 0.9947 REJECT 7d. Problem: Evaluate a project costing $15,000 and returning $3000 annually for 10 years using the PI method and a 13% discount rate.
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
Related questions
Question
![5a. EQ: Internal rate of return = the rate that equates inflows with outflows
5b. Rule: Accept the project if the IRR > the required return.
5c. EX: Reevaluate the project in "1c" using the IRR method and a 10% required return:
IRR 9.70%
REJECT
5d. Problem: Reevaluate the project in "3c" using the IRR method and an 11% required return.
6a. EQ: Modified IRR = [(FV of inflows) / Cost]/n - 1
6b. Rule: Accept the project if the MIRR > the required return.
6c. EX: Reevaluate the project in "1c" using the MIRR method, a 3% re-interest rate and a 10% required
MIRR= [($10,000 x 3.0909) / $25,000] 1/3-1 = 0.0733 or 7.33% REJECT
rate.
6d. Problem: Evaluate a project costing $100,000 and returning $25,000 annually for five years using the
MIRR method, a 4% re-interest rate and a 9% required return.
7a. EQ: Profitability index = PV of the inflows / Cost
7b. Rule: Accept the project if the PI > 1.
7c. EX: Evaluate a project costing $25,000 and returning $10,000 annually for years 1-3 using the PI
method and a 10% discount rate. PI = $24,869 / $25,000 = 0.9947
REJECT
7d. Problem: Evaluate a project costing $15,000 and returning $3000 annually for 10 years using the PI
method and a 13% discount rate.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fd33e0b85-a0a3-462f-92cd-4af7ada4a2b6%2Feeddd880-d2c6-4304-8516-9357a2fe083a%2Fslh8k4w_processed.jpeg&w=3840&q=75)
Transcribed Image Text:5a. EQ: Internal rate of return = the rate that equates inflows with outflows
5b. Rule: Accept the project if the IRR > the required return.
5c. EX: Reevaluate the project in "1c" using the IRR method and a 10% required return:
IRR 9.70%
REJECT
5d. Problem: Reevaluate the project in "3c" using the IRR method and an 11% required return.
6a. EQ: Modified IRR = [(FV of inflows) / Cost]/n - 1
6b. Rule: Accept the project if the MIRR > the required return.
6c. EX: Reevaluate the project in "1c" using the MIRR method, a 3% re-interest rate and a 10% required
MIRR= [($10,000 x 3.0909) / $25,000] 1/3-1 = 0.0733 or 7.33% REJECT
rate.
6d. Problem: Evaluate a project costing $100,000 and returning $25,000 annually for five years using the
MIRR method, a 4% re-interest rate and a 9% required return.
7a. EQ: Profitability index = PV of the inflows / Cost
7b. Rule: Accept the project if the PI > 1.
7c. EX: Evaluate a project costing $25,000 and returning $10,000 annually for years 1-3 using the PI
method and a 10% discount rate. PI = $24,869 / $25,000 = 0.9947
REJECT
7d. Problem: Evaluate a project costing $15,000 and returning $3000 annually for 10 years using the PI
method and a 13% discount rate.
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