Expected Net Cash Flows Year Project X Project Y 0 – $10,000 – $10,000 1 6,500 3,500 2 3,000 3,500 3 3,000 3,500 4 1,000 3,500 Use the Workbook to calculate each project's net present value (NPV), internal rate of return (IRR), modified internal rate of return (MIRR), and profitability index (PI). Which project or projects should be accepted if they are independent? Which project or projects should be acce
Expected Net Cash Flows Year Project X Project Y 0 – $10,000 – $10,000 1 6,500 3,500 2 3,000 3,500 3 3,000 3,500 4 1,000 3,500 Use the Workbook to calculate each project's net present value (NPV), internal rate of return (IRR), modified internal rate of return (MIRR), and profitability index (PI). Which project or projects should be accepted if they are independent? Which project or projects should be acce
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
This homework submission should include all calculations for part (a), completed on the designated tab of the Homework Student Workbook, and a document explaining the implications of your findings for the business or business transaction. After reading this week’s resources, respond to the following:
You are a financial analyst for the Brittle Company. The director of capital budgeting has asked you to analyze two proposed capital investments: Projects X and Y. Each project has a cost of $10,000, and the cost of capital for each is 12%. The projects' expected net cash flows are shown in the table below.
Expected Net Cash Flows
|
Year |
Project X |
Project Y |
|---|---|---|
|
0 |
– $10,000 |
– $10,000 |
|
1 |
6,500 |
3,500 |
|
2 |
3,000 |
3,500 |
|
3 |
3,000 |
3,500 |
|
4 |
1,000 |
3,500 |
- Use the Workbook to calculate each project's
net present value (NPV),internal rate of return (IRR), modified internal rate of return (MIRR), and profitability index (PI). - Which project or projects should be accepted if they are independent?
- Which project or projects should be accepted if they are mutually exclusive?
Transcribed Image Text:A
B
C
Assignment 5-2, Question 1
a.
D
E
F
G
H
J
K
L
M
N
0
P
Q
Net Present Value (NPV):
NPVx =
$
-$10,000
$
$
+
$
+
+
+
=
$
NPVy=
$
$
$
-$10,000
$
+
+
+
+
=
$
Internal Rate of Return (IRR):
To solve for each project's IRR, find the discount rates that equate each NPV to zero:
IRRx
IRRy
=
=
%
%
Modified Internal Rate of Return (MIRR):
To obtain each project's MIRR, begin by finding each project's terminal value (TV) of cash inflows:
TVx
TVy
=
$6,500 (1.12)*3
=
$
+
$
+
$
+
$
+
$1,000
=
$
+
$
+
$3,500
=
$
Now, each project's MIRR is the discount rate that equates the PV of the TV to each project's cost, $10,000:
MIRRx
MIRRy
=
=
%
%
Profitability Index (PI):
To obtain each project's Pl, divide its present value of future cash flows by its initial cost. The PV of future cash flows can be found from the NPV calculated earlier
PVx
=
=
NPVx
$
+
+
Cost of X
$10,000
=
$
PVy
=
NPVy
+
Cost of Y
=
$
+
$
=
$
Plx
=
PVx
÷
Cost of X
=
$
÷
$
=
Ply
=
=
PVy
$
÷
Cost of Y
$
=
3-1 Question 1
3-1 Question 2
3-1 Question 3
5-2 Question 1
+
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