investment decisions. The cash flows for both projects al a. Based on NPV, What projects would Apt be likely to invest in? b. Based on IRR, what projects woutd Heart be tikely to invest in? c. Which project has the fastest payback? Why might that be important to the investment decision?

investment decisions. The cash flows for both projects al a. Based on NPV, What projects would Apt be likely to invest in? b. Based on IRR, what projects woutd Heart be tikely to invest in? c. Which project has the fastest payback? Why might that be important to the investment decision?

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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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

Alt
3. Both companies are considering an investment in Project One, Project
Two, and Project Three. All three projects carry an average amount of risk
for each company. Both companies use Payback, NPV and IRR to make
investment decisions. The cash flows for both projects are shown below.
a. Based on NPV, What projects would Apt be likely to invest in?
b. Based on IRR, what projects woutd Heart be tikety to invest in?
c. Which project has the fastest payback? Why might that be
important to the investment decision?
d. If money had no time value, which project would be the best
decision?
Project One: $10 million initial investment and $2million of free cash flow
at the end of each year for 15 years.
Project Two: $5 million initial investment. Free cash flows for 5 years :
Yr. 1 = $3 million, Yr. 2 = $1.5 million, Yrs. 3-5 = 0.5 million
Project Three: Initial investment of $20 million. One Free Cash flow of $40
million in 8 years. No other Free Cash Flows.

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A firm is considering the following independent projects. Project Investment Present value offuture cash flows NPV A $130 $176 $46 B $103 $115 $12 C $183 $287 $104 D $161 $199 $38 E $184 $273 $89 What is the Profitability Index of Project B? Question 5Answer a. 0.85 b. 1.12 c. 0.89 d. 1.18
The expected value of an investment: Answer a. Is what the owner will receive when the investment is sold b. Is the sum of the payoffs c. Is the probability-weighted sum of the possible outcomes d. Cannot be determined in advance
Suppose an investment has conventional cash flows with positive NPV. how would it impact your decision based on capital budgeting techniques mentioned below? 1.profitability index 2.internal rate of return 3.payback period
How to calculate cash payback period for this investment
Which of the following statements is true? O The salvage value of new equipment should not be considered when using the internal rate of return method to evaluate a project. O The internal rate of return method assumes that the cash flows generated by a project are reinvested at a rate of return that equals the company's cost of capital. O The profitability index and the internal rate of return will always result in the same preference ranking for investment projects. O In calculating the profitability index, the initial investment in the project should be reduced by any proceeds from the sale of old equipment. O None of the above statements is true.
One year ago, your company purchased a machine used in manufacturing for $90,000. You have learned that a new machine is available that offers many advantages and you can purchase it for $155,000 today. It will be depreciated on a straight-line basis over 10 years and has no salvage value. You expect that the new machine will produce a gross margin (revenues minus operating expenses other than depreciation) of $50,000 per year for the next 10 years. The current machine is expected to produce a gross margin of $22,000 per year. The current machine is being depreciated on a straight-line basis over a useful life of 11 years, and has no salvage value, so depreciation expense for the current machine is $8,182 per year. The market value today of the current machine is $55,000. Your company's tax rate is 38%, and the opportunity cost of capital for this type of equipment is 12%. Should your company replace its year-old machine?
To calculate net present value of a project with normal cash flows, find the present value of the expected cash flows, and subtract A) retained earnings. B) the cost of the investment. C) the factor loading. D) the payback period.
The use of natural resources in an economic activity involves setting up a project forharvesting (i.e. extracting) these resources. For the project to be viable, both economic andfinancial indicators - such as net present value (NPV) and internal rate of return (IRR)considering time value of money - are employed. a) Briefly explain the concept of "time value of money". b) Moreover, explain how you will use NPV and IRR to determine the viability of a project.
Select all that are true with respect to the NPV rule for making capital investment decisions. Group of answer choices When done correctly, NPV directly measures expected value creation NPV ignores cash flows in the distant future NPV causes decision makers to be myopic For independent projects, all positive NPV projects should be taken, and negative NPV projects should not be taken For mutually exclusive projects, choose the project with the highest NPV
The average accounting rate of return (AAR): Select one: A. is the best method of financially analysing mutually exclusive projects. B. is similar to the return on assets ratio. C. measures net income as a percentage of the sales generated by a project. D. considers the time value of money. E. is the primary methodology used in analyzing independent projects.
Which provides a better estimate of a project’s “true” rate of return, the MIRR or theregular IRR? Explain.
Q1) How much is the Profitability Index? Q2) What is the Discounted Payback period of the project? Q3) What is the NPV of the Project?

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