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labeled "L") depicts the NPV for a project with larger cash flows later of -$1,000, $100, $300, $400, and $675. The red curve (labeled "S") depicts the NPV for a project with larger cash flows sooner of -$1,000, $500, $400, $300, and $100.

labeled "L") depicts the NPV for a project with larger cash flows later of -$1,000, $100, $300, $400, and $675. The red curve (labeled "S") depicts the NPV for a project with larger cash flows sooner of -$1,000, $500, $400, $300, and $100.

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
Problem 1PS
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The blue curve (labeled "L") depicts the NPV for a project with larger cash flows later of -$1,000, $100, $300, $400, and $675. The red curve (labeled "S") depicts the NPV for a project with larger cash flows sooner of -$1,000, $500, $400, $300, and $100. Drag on the graph either left or right to change the cost of capital interest rate at which the NPV is evaluated for the two projects.

Project S: ���=��0+∑�=1����(1+�)�=−$1,000+$500(1+0.1000)1+$400(1+0.1000)2+$300(1+0.1000)3+$100(1+0.1000)4=$78.82
The blue curve (labeled "L") depicts the NPV for a project with larger cash flows later of -$1,000, $100, $300, $400, and $675. The red curve (labeled "S") depicts the NPV for a project with larger cash flows sooner of -$1,000, $500, $400, $300, and $100. Drag on the graph either left or right to change the cost of capital interest rate at which the NPV is evaluated for the two projects. NPV ($) 500- 400 300 200- 100.40100- 78.82 0 -100- Project S: NPV = CF₁+N CF₁ -1 (1+r) N CF₂ Project L: NPV = CF₁ + Σ = 1 (1+r) ² + ΣΜ = = -S1, 000 + ² L ¡=-$1,000+ S 15 $500 $400 $300 $100 (1+0.1000)¹ (1+0.1000)² (1+0.1000)³ (1+0.1000)* 20 + Cost of Capital (%) $100 $300 $400 $675 (1+0.1000)¹ (1+0.1000) (1+0.1000)³ (1+0.1000)* + + + + + = $78.82 = $100.40
Transcribed Image Text:The blue curve (labeled "L") depicts the NPV for a project with larger cash flows later of -$1,000, $100, $300, $400, and $675. The red curve (labeled "S") depicts the NPV for a project with larger cash flows sooner of -$1,000, $500, $400, $300, and $100. Drag on the graph either left or right to change the cost of capital interest rate at which the NPV is evaluated for the two projects. NPV ($) 500- 400 300 200- 100.40100- 78.82 0 -100- Project S: NPV = CF₁+N CF₁ -1 (1+r) N CF₂ Project L: NPV = CF₁ + Σ = 1 (1+r) ² + ΣΜ = = -S1, 000 + ² L ¡=-$1,000+ S 15 $500 $400 $300 $100 (1+0.1000)¹ (1+0.1000)² (1+0.1000)³ (1+0.1000)* 20 + Cost of Capital (%) $100 $300 $400 $675 (1+0.1000)¹ (1+0.1000) (1+0.1000)³ (1+0.1000)* + + + + + = $78.82 = $100.40
1. What is the approximate cost of capital for which the two cash flows are about equal? a. 10% b. 12% c. 13.5% d. 14.5% -Select- 2. What is the approximate internal rate of return (IRR) for the Project L cash flow? a. 10% b. 12% c. 13.5% d. 14.5% -Select- 3. What is the approximate internal rate of return (IRR) for the Project S cash flow? a. 10% b. 12% c. 13.5% d. 14.5% -Select- 4. What is the name for the point at which the two projects" NPVs are equal? a. Inflection point b. Equal NPV rate c. Crossover rate d. There is no special name for this point -Select- 5. At a cost of capital less than the point at which they cross, which project will have the higher NPV? a. Project S b. Project L c. Project S and L will have the same NPV d. Cannot determine -Select- 6. At a cost of capital greater than the point at which they cross, which project will have the higher NPV? a. Project S b. Project L c. Project S and L will have the same NPV d. Cannot determine -Select- 7. The internal rate of return (IRR) is the point at which a project's NPV equals 0. If the cost of capital were 5% (move the slider so that is the case), then a. Project S is the better project because it has the higher IRR. b. Project L is the better project because it has the higher NPV. c. It depends because there is a conflict between IRR and NPV. -Select- 8. If the cost of capital was greater than the point at which the two projected NPVS are equal, then a. It depends because there is a conflict between IRR and NPV. b. There is no conflict because Project S has both a higher NPV and a higher IRR than Project L. c. There is no conflict because Project L has both a higher NPV and a higher IRR than Project S. -Select-
Transcribed Image Text:1. What is the approximate cost of capital for which the two cash flows are about equal? a. 10% b. 12% c. 13.5% d. 14.5% -Select- 2. What is the approximate internal rate of return (IRR) for the Project L cash flow? a. 10% b. 12% c. 13.5% d. 14.5% -Select- 3. What is the approximate internal rate of return (IRR) for the Project S cash flow? a. 10% b. 12% c. 13.5% d. 14.5% -Select- 4. What is the name for the point at which the two projects" NPVs are equal? a. Inflection point b. Equal NPV rate c. Crossover rate d. There is no special name for this point -Select- 5. At a cost of capital less than the point at which they cross, which project will have the higher NPV? a. Project S b. Project L c. Project S and L will have the same NPV d. Cannot determine -Select- 6. At a cost of capital greater than the point at which they cross, which project will have the higher NPV? a. Project S b. Project L c. Project S and L will have the same NPV d. Cannot determine -Select- 7. The internal rate of return (IRR) is the point at which a project's NPV equals 0. If the cost of capital were 5% (move the slider so that is the case), then a. Project S is the better project because it has the higher IRR. b. Project L is the better project because it has the higher NPV. c. It depends because there is a conflict between IRR and NPV. -Select- 8. If the cost of capital was greater than the point at which the two projected NPVS are equal, then a. It depends because there is a conflict between IRR and NPV. b. There is no conflict because Project S has both a higher NPV and a higher IRR than Project L. c. There is no conflict because Project L has both a higher NPV and a higher IRR than Project S. -Select-
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