Managers are evaluating two independentprojects. Project X has a NPV of $282,500 and aprofitability index of 2.1. Project Y has a NPV of $320,000 and a profitability index of 1.7. Which ofthe following statements are correct?Multiple select question.If funds are not limited, the company should onlyinvest in the project Y.If funds are limited, Project Y should be selectedbecause it has the highest net present value.If funds are limited, Project X should be selectedbecause it has the highest profitability index.If funds are not limited, the company shouldconsider investing in both projects.

The information provided in the question about the two projects shows:Project X: NPV = $282,500,…

Answered: Managers are evaluating two independent…

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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Yonan Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the shorter payback, some value may be forgone. How much value will be lost in this instance? Note that under some conditions choosing projects on the basis of the shorter payback will not cause value to be lost. WACC: 14.25% 0 1 2 3 4 CFS -$950 $500 $800 $0 $0 CFL -$2,100 $400 $800 $800 $1,000 G $93.62 $95.90 $127.87 $0.00 $116.46
Martin Weir is evaluating a new project to determine viability for Jonathon's Restaurant's. As part of the new Jonathon's PMO, Marty is responsible for preparing project justifications and he must evaluate the project's cash flows and investment potential. As a first step, Marty developed a table of revenues and investments (see below) that he plans to use in calculating a variety of performance metrics including NPV. Marty understands that a project's discount rate may not be constant throughout the life of the project and he plans to use 0.32 as the initial discount rate, switching to 0.19 beginning in year 4 to more accurately represent the cash costs and imputed risk over time. Assume all cash flows occur at the end of the specified year and calculate all cash flow values and discounted cash flow values to three decimal places. Round discounted values to 3 decimal places before performing subsequent calculations. investment Reveune 13.8 0 14.9 20.3 12.3 27.5 17.6 24.9…
The capital budgeting process is comprehensive and is based on certain assumptions, models, and benchmarks. This process often begins with a project analysis. Generally, the first step in a capital budgeting project analysis-which occurs before any evaluation method is applied-involves estimating the Evaluating cash flows with the NPV method The net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions. Consider this case: Suppose Cute Camel Woodcraft Company is evaluating a proposed capital budgeting project (project Alpha) that will require an initial investment of $500,000. The project is expected to generate the following net cash flows: Year Year 1 Year 2 Year 3 Year 4 Cash Flow $350,000 500,000 450,000 500,000 Cute Camel Woodcraft Company's weighted average cost of capital is 7%, and project Alpha has the same risk as the firm's average project. Based on the cash flows, what is project Alpha's net…
Devril plc is considering the investment in a project that has an initial cash outlay followed by a series of net cash inflows. The business applied the NPV and IRR methods to evaluate the proposal but, after the evaluation had been undertaken, it was found that the correct cost of capital figure was lower than that used in the evaluation. What will be the effect of correcting for this error on the NPV and IRR figures? a. NPV Increase IRR Decrease Ob. NPV Increase IRR Increase OC. NPV Decrease IRR Decrease d. NPV Decrease IRR No change Oe. NPV Increase IRR No Change Jump to... 1 Academic Integrity
Suppose you are considering a project with an initial investment of $500,000. This project has an estimated net present value (NPV) of $750,000. How would you explain the meaning of the $750,000 net present value (NPV) to a nonfinancial manager? O The positive NPV indicates this project is expected to increase the value of the firm by $250,000. The positive NPV indicates this project is expected to increase the value of the firm by $750,000. The project benefits outweigh the costs by $250,000 on a present value basis. O The project benefits outweigh the costs by $500,000 on a present value basis.
I need solutions for questions d, e, f, g, h and i. Thanks d. Are this project’s cash flows likely to be positively or negatively correlated withreturns on Cory’s other projects and with the economy, and should this matter in youranalysis? Explain.e. Unrelated to the new product, Cory is analyzing two mutually exclusive machines thatwill upgrade its manufacturing plant. These machines are considered average-riskprojects, so management will evaluate them at the firm’s 10% WACC. Machine Xhas a life of 4 years, while Machine Y has a life of 2 years. The cost of each machineis $60,000; however, Machine X provides after-tax cash flows of $25,000 per year for4 years and Machine Y provides after-tax cash flows of $42,000 per year for 2 years. Themanufacturing plant is very successful, so the machines will be repurchased at the endof each machine’s useful life. In other words, the machines are “repeatable” projects.1. Using the replacement chain method, what is the NPV of the better machine?2.…
Mike Riskless is considering two projects. He has estimated the IRR for each under three possible scenarios and assigned probabilities of occurrence to each scenario. State of Economy Probability Estimated BTIRR Investment I Estimated BTIRR Investment II Optimistic 0.20 0.15 0.20 Most likely 0.60 0.10 0.15 Pessimistic 0.20 0.05 0.05 1.00 Riskless is aware that the pattern of returns for Investment II looks very attractive relative to Investment I; however, he believes that Investment II could be more risky than Investment I. He would like to compare the two investments considering both the risk and return on each. Required: a. Compute BTIRR under each of the three possible scenarios. b. Compute variance and standard deviation of the IRRs.
Suppose Tapley Inc. uses a WACC of 8% for below-average risk projects, 10% for average-risk projects, and 12% for above-average risk projects. Which of the following independent projects should Tapley accept, assuming that the company uses the NPV method when choosing projects? A. Without information about the projects' NPVs we cannot determine which project(s) should be accepted. B. Project C, which has above-average risk and an IRR = 11%. C. Project A, which has average risk and an IRR = 9%. D. Project B, which has below-average risk and an IRR = 8.5%. E. All of these projects should be accepted.
All parts are under one questions and per your policy can be answered. 3. Understanding the IRR and NPV The net present value (NPV) and internal rate of return (IRR) methods of investment analysis are interrelated and are sometimes used together to make capital budgeting decisions. Consider the case of Green Caterpillar Garden Supplies Inc.: Last Tuesday, Green Caterpillar Garden Supplies Inc. lost a portion of its planning and financial data when both its main and its backup servers crashed. The company’s CFO remembers that the internal rate of return (IRR) of Project Gamma is 13.2%, but he can’t recall how much Green Caterpillar originally invested in the project nor the project’s net present value (NPV). However, he found a note that detailed the annual net cash flows expected to be generated by Project Gamma. They are: Year Cash Flow Year 1 $2,400,000 Year 2 $4,500,000 Year 3 $4,500,000 Year 4 $4,500,000 The CFO has asked you to compute Project…
Eddie Corporation is considering the following three investment projects (Ignore income taxes.): Project D $ 65,600 $ 76,096 Multiple Choice Investment required Present value of cash inflows Rank the projects according to the profitability index, from most profitable to least profitable. O E, C, D E, D, C D, C, E Project C $ 57,600 $ 63,936 C, E, D. Project E $ 136,000 $ 148,240
Companies often use several methods to evaluate the project’s cash flows and each of them has its benefits and disadvantages. Based on your understanding of the capital budgeting evaluation methods, which of the following conclusions about capital budgeting are valid? Check all that apply. The discounted payback period improves on the regular payback period by accounting for the time value of money. For most firms, the reinvestment rate assumption in the NPV is more realistic than the assumption in the IRR. Because the MIRR and NPV use the same reinvestment rate assumption, they always lead to the same accept/reject decision for mutually exclusive projects. True or False: Sophisticated firms use only the NPV method in capital budgeting decisions.
If Fuzzy Button Clothing Company's managers select projects based on the MIRR criterion, they should this independent project. Which of the following statements best describes the difference between the IRR method and the MIRR method? O The IRR method uses the present value of the initial investment to calculate the IRR. The MIRR method uses the terminal value of the initial investment to calculate the MIRR. O The IRR method uses only cash inflows to calculate the IRR. The MIRR method uses both cash inflows and cash outflows to calculate the MIRR. O The IRR method assumes that cash flows are reinvested at a rate of return equal to the IRR. The MIRR method assumes that cash flows are reinvested at a rate of return equal to the cost of capital.

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