follows: period 1, -$100; period 2, $200. Assume a time value of money of 0.05. Should the company invest now or delay one year? First use the internal rate of return method and then use the net present value method. 15. The IBC Company is considering undertaking an investment that promises the following cash flows: Period 0 -$100 Period 1 $80 Period 2 $80 If the company waits a year, it can make the following investment: Period 1 -2 $220 Period $280 Assume a time value of 0.10. Which investment should the firm undertake? Use both the net present value and IRR approaches. With the IRR method, use incremental cash flows.
follows: period 1, -$100; period 2, $200. Assume a time value of money of 0.05. Should the company invest now or delay one year? First use the internal rate of return method and then use the net present value method. 15. The IBC Company is considering undertaking an investment that promises the following cash flows: Period 0 -$100 Period 1 $80 Period 2 $80 If the company waits a year, it can make the following investment: Period 1 -2 $220 Period $280 Assume a time value of 0.10. Which investment should the firm undertake? Use both the net present value and IRR approaches. With the IRR method, use incremental cash flows.
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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#15 is the question
Transcribed Image Text:A. Bookshelf - The Capital Budget x
1 VitalSource Bookshelf: The Cap x
b My Questions | bartleby
Week 2 Assignment
G The IBC Company is considerin
+
A online.vitalsource.com/#/books/9781135656232/cfi/6/24!/4/272/10/26/2/2@0:64.8
-$100
$150
$50
$50
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4. Mutually Exclusive...
If it waits a year, it can invest in an alternative (that is, mutually exclusive) investment that promises to pay
Go to 4. Mutually Exclusive
Investments
Period 1
-5150
Period 2
$250
Period 3
$50
Reinvestment rate of return
Assume a time value of money of 0.05.
Which investment should the firm undertake? Use the present value method and the internal rate of return approaches. With the IRR
approach, use the incremental cash flows.
14. The Arabian Oil Company is considering an investment that can be undertaken this year or postponed one year. The investment cash flows if
the investment is undertaken now would be as follows: period 0, -$100; period 1, $200. The cash flows if it is delayed one period would be as
follows: period 1, -$100; period 2, $200. Assume a time value of money of 0.05.
Loan-type flows
Multiple internal rates of return
Should the company invest now or delay one year? First use the internal rate of return method and then use the net present value method.
15. The IBC Company is considering undertaking an investment that promises the following cash flows:
Interpretation of multiple IRRS
Period 0
-$100
Period 1
$80
Period 2
$80
A "paradox"
If the company waits a year, it can make the following investment:
Converting multiple IRRS to a single
Period 1
Period
IRR
-2 S220
$280
Significance of nonconventional
Assume a time value of 0.10. Which investment should the firm undertake? Use both the net present value and IRR approaches. With the IRR
method, use incremental cash flows.
16. Assume that there are two mutually exclusive investments, A and B, as shown below. Which of the two investments would be chosen using the
index of present value? Assume a cost of money of 10 percent. The index of present value equals the present value of benefits divided by the
present value of the outlays.
cash flows
Ranking independent investments
Mutually exclusive alternatives with
Investment
Perlod
different risks
1
Duration: a sensitivity measure
A.
- $4,000
$11,000
В
-20,000
33,000
Why the internal rate of return
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Expert Solution
Step 1
Time value of money means decline in value of money with the passage of time due to inflation, etc. It play very important role to determine correct profitability of project.
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