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(iv) Find the discounted paybacks for Projects L and S. According to the payback criterion, which project(s) should be accepted if the firm's maximum acceptable payback is 2 years, if Projects L and S are independent, if Projects L and S are mutually exclusive?

(iv) Find the discounted paybacks for Projects L and S. According to the payback criterion, which project(s) should be accepted if the firm's maximum acceptable payback is 2 years, if Projects L and S are independent, if Projects L and S are mutually exclusive?

Essentials Of Investments
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
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You recently went to work for Allied Components Company, a supplier of auto repair parts used in the after-market with products from Daimler, Chrysler, Ford, and other automakers. Your boss, the chief financial officer (CFO), has just handed you the estimated cash flows for two proposed projects. Project Linvolves adding a new item to the firm's ignition system line; it would take some time to build up the market for this product, so the cash inflows would increase over time. Project S involves an add-on to an existing line, and its cash flows would decrease over time. Both projects have 3-year lives because Allied is planning to introduce entirely new models after 3 years. Here are the projects' net cash flows (in thousands of dollars): Project L -$100 $10 Project S -$100 $70 Year 0 (Initial Investment) 1 2 $60 $50 $80 $20 Depreciation, salvage values, net working capital requirements, and tax effects are all included in these cash flows. The CFO also made subjective risk assessments of each project, and he concluded that both projects have risk characteristics that are similar to the firm's average project. Allied's cost of capital/discount rate (r) is 10%. (i) Calculate Each Project's NPV using the NPV formula. According to NPV, which project(s) should be accepted if they are independent? mutually exclusive? (ii) Calculate Each Project's IRR using Excel According to IRR, which project(s) should be accepted if they are independent? mutually exclusive? (iii) should be accepted if the firm's maximum acceptable payback is 2 years, if Projects L and S are independent, if Projects L and S are mutually exclusive? Find the paybacks for Projects L and S. According to the payback criterion, which project(s) (iv) Find the discounted paybacks for Projects L and S. According to the payback criterion, which project(s) should be accepted if the firm's maximum acceptable payback is 2 years, if Projects Land S are independent, if Projects L and S are mutually exclusive?
Transcribed Image Text:You recently went to work for Allied Components Company, a supplier of auto repair parts used in the after-market with products from Daimler, Chrysler, Ford, and other automakers. Your boss, the chief financial officer (CFO), has just handed you the estimated cash flows for two proposed projects. Project Linvolves adding a new item to the firm's ignition system line; it would take some time to build up the market for this product, so the cash inflows would increase over time. Project S involves an add-on to an existing line, and its cash flows would decrease over time. Both projects have 3-year lives because Allied is planning to introduce entirely new models after 3 years. Here are the projects' net cash flows (in thousands of dollars): Project L -$100 $10 Project S -$100 $70 Year 0 (Initial Investment) 1 2 $60 $50 $80 $20 Depreciation, salvage values, net working capital requirements, and tax effects are all included in these cash flows. The CFO also made subjective risk assessments of each project, and he concluded that both projects have risk characteristics that are similar to the firm's average project. Allied's cost of capital/discount rate (r) is 10%. (i) Calculate Each Project's NPV using the NPV formula. According to NPV, which project(s) should be accepted if they are independent? mutually exclusive? (ii) Calculate Each Project's IRR using Excel According to IRR, which project(s) should be accepted if they are independent? mutually exclusive? (iii) should be accepted if the firm's maximum acceptable payback is 2 years, if Projects L and S are independent, if Projects L and S are mutually exclusive? Find the paybacks for Projects L and S. According to the payback criterion, which project(s) (iv) Find the discounted paybacks for Projects L and S. According to the payback criterion, which project(s) should be accepted if the firm's maximum acceptable payback is 2 years, if Projects Land S are independent, if Projects L and S are mutually exclusive?
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