Example 5:A firm is evaluating two mutually exclusive investment proposals for a project that will last for fiveyears, with negligible salvage value. The minimum attractive rate of return (MARR) for the firm is14.5%. The details of the two alternatives are as follows:InvestmentAnnual net incomeAlternativesA1A2$150,000$230,000$60,000$80,000Find the best alternative based on the rate of return method of comparison.

The rate of return method was used to calculate the internal rate of return (IRR) for both…

Answered: Example 5: A firm is evaluating two…

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: Consider the following information. If you apply the profitability index criterion, which investment will you choose? Suppose that whichever project you choose, if any, you will require a 15% return on your investment. Year CF of Project A CF of Project B 0 -$350,000 -$50,000 1 45,000 24,000 2 65,000 22,000 3 65,000 19,500 4 440,000 14,600
A project requires an investment of $2,500 and has a net present value of $430. If the internal rate of return is 10%, what is the profitability index for the project? Multiple Choice 0.70 0.25 1.17 2.33
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2. Data for two alternatives are as follows: Alternatives A B Investment P35, 000 P50, 000 Annual benefits P20, 000 P25, 000 Annual O and M P6, 450 P13, 830 Estimated life, years 4 8. Net salvage value Р3, 500 Using an interest rate of 20%, which alternative should be chosen? Ans: Alternative A is referred over Alternative B
es Lopez Company is considering three alternative investment projects below: Project 1 5.2 years $ 26,700 Project 2 5.7 Years $ 33,700 14.2% 13.1% Payback period Net present value Internal rate of return a. Payback period b. Net present value c. Internal rate of return. Which project is preferred if management makes its decision based on (a) payback period, (b) net present value, and (c) internal rate of return? Preferred Investment Project 3 4.9 Years Reason $19,700 12.5%
NPV Calculate the net present value (NPV) for a 15-year project with an initial investment of $20,000 and a cash inflow of $4,000 per year. Assume that the firm has an opportunity cost of 17%. Comment on the acceptability of the project. The project's net present value is $ (Round to the nearest cent.) Is the project acceptable? (Select the best answer below.) No Yes
A project is estimated to cost P120T, last 8 years & have a salvage value of P20T. The annual gross income is expected to average P40k & annual expenses is P6T. If capital is earning 12% determine if this a desirable investment using rate of return. What is your computed ROR? Select one: a. 20.07% b. 21.07% c. 17.17% d. 23.17%
Problem 2. The first cost (FC), life (n), and annual benefits (A) for a prospective project are uncertain. Optimistic (OP), most likely (ML), and pessimistic (PS) estimates are given. The salvage value is 20% of the first cost. If the interest rate is 25%, what is the mean value of NPW? Parameter First cost Annual benefit Salvage value Project life in years Pessimistic $150,000 $50,000 $30,000 5 Answer: The mean value of NPW is Most likely $100,000 $45,000 $20,000 7 Optimistic $80,000 $40,000 $16,000 10
A firm evaluates all of its projects by applying the NPV decision rule. A project under consideration has the following cash flows: Year Cash Flow 0. -$ 41,000 20,000 23,000 14,000 1 3. What is the NPV of the project if the required return is 11 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g.., 32.16.) NPV At a required return of 11 percent, should the firm accept this project? No O Yes What is the NPV of the project if the required return is 24 percent? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
10. Jefferson International is trying to choose between the following two mutually exclusive design projects: The required return is 25 %. If the company applies the profitability index (PI) decision rule, which project should the firm accept? If the company applies the NPV decision rule, which project should it take? Given your first two answers, which project should the firm actually accept? Year Cash flows (A) Cash flows (B) 0 $ 92,000 $ 72,000 1 $ 26,900 $ 37,900 2 $ 26,900 $45,600 3 $92,700 $ 25,000
A fim evaluates a project with the following cash flows. The firm has a 2 year payback period criteria and a required return of 11 percent. Year Cash flow |(OMR) -24,000 17,000 12,000 9,000 -8,000 11,000 2 3 4 5 11. What is the net present value for the project? 12. What is the payback period for the project? 13. What is the discounted payback period for the project? 14. What is the profitability index for the project? 15. Given your analysis, should the firm accept or reject the project?

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