Estimating the cash flow generated by $1 invested in investment The profitability index (PI) is a capital budgeting tool that is defined as the present value of a project's cash inflows divided by the absolute value of its initial cash outflow. Sonaiya Development Group is considering investing $3,225,000 in a project that is expected to generate the following net cash flows: Year Cash Flow Year 1 $325,000 Year 2 $450,000 Year 3 $475,000 Year 4 $475,000 Sonaiya Development Group uses a WACC of 9% when evaluating proposed capital budgeting projects. Based on these cash flows, determine this project's PI: 0.4494 0.4066 0.4708 0.4280 Sonaiya Development Group's decision to accept or reject this project is independent of its decisions on other projects. Based on the project's PI, the firm should the project. By comparison, the NPV of this project is . On the basis of this evaluation criterion, Sonaiya Development Group should in the project because the project_ increase the firm's value. A project with a negative NPV will have a PI that is ; when it has a PI of 1.0, it will have an NPV

Estimating the cash flow generated by $1 invested in investment The profitability index (PI) is a capital budgeting tool that is defined as the present value of a project's cash inflows divided by the absolute value of its initial cash outflow. Sonaiya Development Group is considering investing $3,225,000 in a project that is expected to generate the following net cash flows: Year Cash Flow Year 1 $325,000 Year 2 $450,000 Year 3 $475,000 Year 4 $475,000 Sonaiya Development Group uses a WACC of 9% when evaluating proposed capital budgeting projects. Based on these cash flows, determine this project's PI: 0.4494 0.4066 0.4708 0.4280 Sonaiya Development Group's decision to accept or reject this project is independent of its decisions on other projects. Based on the project's PI, the firm should the project. By comparison, the NPV of this project is . On the basis of this evaluation criterion, Sonaiya Development Group should in the project because the project_ increase the firm's value. A project with a negative NPV will have a PI that is ; when it has a PI of 1.0, it will have an NPV

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 21P

See similar textbooks

Similar questions

Fenton, Inc., has established a new strategic plan that calls for new capital investment. The company has a 9.8% required rate of return and an 8.3% cost of capital. Fenton currently has a return of 10% on its other investments. The proposed new investments have equal annual cash inflows expected. Management used a screening procedure of calculating a payback period for potential investments and annual cash flows, and the IRR for the 7 possible investments are displayed in image. Each investment has a 6-year expected useful life and no salvage value. A. Identify which project(s) is/are unacceptable and briefly state the conceptual justification as to why each of your choices is unacceptable. B. Assume Fenton has $330,000 available to spend. Which remaining projects should Fenton invest in and in what order? C. If Fenton was not limited to a spending amount, should they invest in all of the projects given the company is evaluated using return on investment?
Your division is considering two investment projects, each of which requires an up-front expenditure of 15 million. You estimate that the investments will produce the following net cash flows: a. What are the two projects net present values, assuming the cost of capital is 5%? 10%? 15%? b. What are the two projects IRRs at these same costs of capital?
Calculate the cash flows for each year. Based on these cash flows and the average project cost of capital, what are the projects NPV, IRR, MIRR, PI, payback, and discounted payback? Do these indicators suggest that the project should be undertaken?
9. Profitability index Estimating the cash flow generated by $1 invested in a project The profitability index (PI) is a capital budgeting tool that is defined as the present value of a project's cash inflows divided by the absolute value of its initial cash outflow. Consider this case: Purple Whale Foodstuffs Inc. is considering investing $2,750,000 in a project that is expected to generate the following net cash flows: Year Year 1 Year 2 Year 3 Year 4 Cash Flow $325,000 $450,000 $500,000 $500,000
The net cash flow per year for the investment projects A and B, is presented in the table below. Expected Net Cash Flow ($) Project 0 1 2 3 4 A -10,000 6500 3000 3000 1000 B -10,000 3500 3500 3500 3500 Calculate the NPV, IRR, PI, and PVR for the cash flows given in the following table. Assume the minimum acceptable rate of return of 8%. Which projects should be accepted if they are independent projects? Would the selection of the projects change if the cost of capital were 12%?
The profitability index (PI) is a capital budgeting tool that is defined as the present value of a project's cash inflows divided by the absolute value of its initial cash outflow. Consider this case: Blue Moose Home Builders is considering investing $2,500,000 in a project that is expected to generate the following net cash flows: Year Cash Flow Year 1 $325,000 Year 2 $475,000 Year 3 Year 4 $500,000 $500,000 Blue Moose Home Builders uses a WACC of 7% when evaluating proposed capital budgeting projects. Based on these cash flows, determine this project's PI (rounded to four decimal places) 0.5731 0.6335 0.6033 O 0.7240 Blue Moose Home Builders's decision to accept or reject this project is independent of its decisions on other projects. Based on the project's PI, the firm should the project. By comparison, the NPV of this project is in the project because the project A project with a negative NPV will have a PI that is . On the basis of this evaluation criterion, Blue Moose Home…
Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) -$ 15,456 5,225 8,223 13,013 8,705 0 1 234 -$ 276,363 26,400 51,000 57,000 402,000 Whichever project you choose, if any, you require a 6 percent return on your investment. a. What is the payback period for Project A? Payback period b. What is the payback period for Project B? Payback period c. What is the discounted payback period for Project A? Discounted payback period
A project will generate the following cash flows. The required rate of return is 15%. If the profitability index is 1.7, what is the initial investment for this project? Year Cash flow 1 $15,000 2 $16,000 3 $17,000 4 $18,000 5 $19,000 Select one: a. $26,217.06 b. $31,460.47 c. $32,974.98 d. $37,752.57 e. $95,297.70
You are analyzing two proposed capital investments with the following cash flows: Year Project X Project Y - $20,000 - $20,000 12,630 7,470 5,660 7,470 3 6,360 7,470 4 1,920 7,470 1, 2.
Refer to two projects with the following cash flows: Year Project A Project B 0 -$110 -$110 1 45 55 2 45 55 3 45 55 4 45 If the opportunity cost of capital is 11%, what is the profitability index for each project?
1. What is the net present value of a project with the following cash flows if the requiredrate of return is 12 percent? Year Cashflow 0 -$42,398 1 $13,407 2 $21,219 3 $17,800
4. What is the internal rate of return for a project that has a net investment of $14,600 (Time 0 outflow) and a single net cash flow of $25,750 in 6 years? Use excel formula