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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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.
be appropriate? Explain. 8.4 Average Accounting Return Concerning AAR: LO 2 Describe how the average accounting return is usually calculated and describe the information this measure provides about a sequence of cash flows. What is the AAR criterion decision rule? a. b. What are the problems associated with using the AAR as a means of evaluating a project's cash flows? What underlying feature of AAR is most troubling to you from a financial perspective? Does the AAR have any redeeming qualities?
investments we make today generate cash flows at different time intervals in the future.This makes the evaluation process complicated.How do you address this issue when ivaluating investment projects
Consider the following sets of investment projects: (a) Classify each project as either simple or nonsimple.(b) Compute the i* for Project A, using the quadratic equation.(c) Obtain the rate(s) of return for each project by plotting the PW as a function of interest rate.
Q. A positive NPV forecast for a new project is reliable only if it is based on Multiple Choices: - forecasts of cash flows. - identifiable sources of economic rents. - Michael Porter's theories. - results from Monte Carlo analysis.
NPV measures a. the change in firm value b. the profitability of an investment c. the change in wealth d. the present value of the future net cash flows from the investment e. all of the above
Compute the discounted payback statistic for Project y and recommend whether the firm should accept or reject the project with the cash flows shown as follows
Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. a. If a project's IRR is greater than its WACC, then the MIRR will be greater than the IRR. b. If a project's IRR is greater than its WACC, then the MIRR will be less than the IRR. c. A project's MIRR is always greater than its regular IRR. d. To find a project's MIRR, we compound cash inflows at the IRR and then discount the terminal value back to t = 0 at the WACC. e. A project's MIRR is always less than its regular IRR.
The benefits of CSR investments a. are always easy to measure quantitatively b. must be evaluated qualitatively for the projects that cannot be evaluated quantitatively c. must be evaluated using all three aspects of the triple bottom line d. cannot be evaluated qualitatively
Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. O a. If a project's IRR is positive, then its NPV must also be positive. O b. A project's regular IRR is found by compounding the cash inflows at the WACC to find the present value (PV), then discounting the TV to find the IRR. O c. A project's IRR is the discount rate that causes the PV of the inflows to equal the project's cost. O d. If a project's IRR is smaller than the WACC, then its NPV will be positive. O e. A project's regular IRR is found by compounding the initial cost at the WACC to find the terminal value (TV), then discounting the TV at the WACC.
Which of the following is a present value method of analyzing capital investment proposals? Oaverage rate of return O cash payback method O accounting rate of return net present value

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