A low-risk, 4-year investment opportunity promises to pay $3,000, $6,000, and $5,000 at the end of the first, second and fourth year, respectively. A cash injection of $1,000 is required at the end of the third year. The investment may be purchased for $10,000, which would have to be borrowed at an effective interest rate of 10%. Use Economic Value Added principle to determine whether the investment should be undertaken.

A low-risk, 4-year investment opportunity promises to pay $3,000, $6,000, and $5,000 at the end of the first, second and fourth year, respectively. A cash injection of $1,000 is required at the end of the third year. The investment may be purchased for $10,000, which would have to be borrowed at an effective interest rate of 10%. Use Economic Value Added principle to determine whether the investment should be undertaken.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Similar questions

1.Assuming you are facing with making a decision on a large capital investment proposal. the capital investment amount is $ Estimated the study period is years .The annual revenue at the end of each year is $ and the estimated annual year-end expense is $ starting in year Assuming a market value at the end year is $ and the benchmark rate is 10%, please answer the following questions: 1.Please design this investment project to fill the proper number in blank space to let the project is feasible in economics( 2.To give the cash flow chart of the project(
Use PRESENT WORTH. Show complete solution and cash flow diagram.
2a. Explain the concept of Net Present Value and Discount rates. Gentry Limited is deciding whether to undertake a project which longs for three years. The expected total project cost is 15,000,000 ZMW today and the expected income after three years will be $25,000,000 ZMW. Use a discount rate of 10% to advise Gentry Limited director if this is a good investment or not. Give reasons for your answer.
What is the payback period on each of the above projects? Given that you wish to use the payback rule with a cutoff period of two years, which projects would you accept? Why? If you use a cutoff period of three years, which projects would you accept? Why? If the opportunity cost of capital is 10%, which projects have positive NPVs? How do you know? “If a firm uses a single cutoff period for all projects, it is likely to accept too many short-lived projects.” Is this statement true or false? How do you know? If the firm uses the discounted-payback rule, will it accept any negative NPV projects? Will it turn down any positive NPV projects? How do you know?
(Net present value calculation) Big Steve's, makers of swizzle sticks, is considering the purchase of a new plastic stamping machine. This investment requires an initial outlay of $90,000 and will generate net cash inflows of $20,000 per year for 11 years. a. What is the project's NPV using a discount rate of 9 percent? Should the project be accepted? Why or why not? b. What is the project's NPV using a discount rate of 14 percent? Should the project be accepted? Why or why not? c. What is this project's internal rate of return? Should the project be accepted? Why or why not? a. If the discount rate is 9 percent, then the project's NPV is $. (Round to the nearest dollar.)
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 13 percent, and that the maximum allowable payback and discounted payback statistic for the project are 2 and 3 years, respectively. Time 0 1 2 3 4 5 6 Cash Flow -1,110 70 530 730 730 330 730 Use the payback decision rule to evaluate this project; should it be accepted or rejected? Multiple Choice A. 1.10 years, accept B. 4.00 years, reject C. 2.70 years, reject D. 0 years, accept
You’re considering 2 investment projects. Option 1 involves $1 million upfront investment and has been evaluated to yield $300K for 5 years from year 1 on. Option 2 involves $1.35 million and will yield of 300K for 7 years from year 1 on for the next 7 years. A) Assuming a risk adjusted rate of 9%, evaluate the value of the investments over the duration. Which one would you consider as worthwhile to invest in?
YOU ARE A FINANCIAL ANALYST FOR A COMPANY THAT IS CONSIDERING A NEW PROJECT. IF THE PROJECT IS ACCEPTED, IT WILL USE A FRACTION OF A STORAGE FACILITY THAT THE COMPANY ALREADY OWNS BUT CURRENTLY DOES NOT USE. THE PROJECT IS EXPECTED TO LAST 10 YEARS, AND THE ANNUAL DISCOUNT RATE IS 10% (COMPOUNDED ANNUALLY). YOU RESEARCH THE POSSIBILITIES, AND FIND THAT THE ENTIRE STORAGE FACILITY CAN BE SOLD FOR €100,000 AND A SMALLER (BUT BIG ENOUGH) FACILITY CAN BE ACQUIRED FOR €40,000. THE BOOK VALUE OF THE EXISTING FACILITY IS €60,000, AND BOTH THE EXISITING AND THE NEW FACILITIES (IF IT IS ACQUIRED) WOULD BE DEPRECIATED STRAIGHT LINE OVER 10 YEARS (DOWN TO A ZERO BOOK VALUE). THE CORPORATE TAX RATE IS 40%. DISCUSS WHAT IS THE OPPORTUNITY COST OF USING THE EXISTING STORAGE CAPACITY?
Terri Allessandro has an opportunity to make any of the following investments: E. The purchase price, the lump-sum future value, and the year of receipt are given below for each investment. Terri can earn a rate of return of 13% on investments similar to those currently under consideration. Evaluate each investment to determine whether it is satisfactory, and make an investment recommendation to Terri. The present value, PV, at 13% required return of the income from Investment A is S . (Round to the nearest cent.) - X Data table Purchase Price Future Value Year of Receipt Investment $8.674 $21,000 $2.000 15 $429 $2.282 $57 11 $10,000 54 $14,000 (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet) Clear all Check answer Heln me BCDS
You are considering a risk-free investment that costs $4000 and pays $5000 in one year. You can either pay all cash for the investment or you can borrow part and pay cash for the other part. If you borrow $2000, you will be required to pay back $2080 in one year. The risk-free rate is 4%. What is the project’s NPV? Is the NPV affected if you borrow some of the funds?
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 11 percent, and that the maximum allowable payback and discounted payback statistic for the project are 2 and 3 years, respectively. Time 0 1 2 3 4 5 6 Cash Flow -1,040 140 460 660 660 260 660 Use the NPV decision rule to evaluate this project; should it be accepted or rejected?
An investment of $1,600,000 will return $320,000 per year for 6 years. Should the investment be undertaken if the required rate of return is 5%? Use the appropriate tables in Appendix A to obtain the relevant present value factor and round up your final answer to the nearest dollar. Group of answer choices Yes because the NPV is greater than zero. No, the investment rate of return is not high enough to meet the required rate of return. Can't be determined because given data does not provide all necessary information. Yes because the NPV is less than zero.