ng-term investment decision, payback method Personal Finance Problem Bill Williams has the opportunity to invest in project A that costs $6,800 today and promises to pay $2,100, $2,500, $2,500, $2,000 and $1,800 over the next 5 years. Or, Bill can invest $6,800 in ject B that promises to pay $1,500, $1,500, $1,500, $3,500 and $3,900 over the next 5 years. (Hint: For mixed stream cash inflows, calculate cumulative cash inflows on a year-to-year basis until the initial investment is recovered.) How long will it take for Bill to recoup his initial investment in project A? How long will it take for Bill to recoup his initial investment in project B? Using the payback period, which project should Bill choose? Do you see any problems with his choice?

ng-term investment decision, payback method Personal Finance Problem Bill Williams has the opportunity to invest in project A that costs $6,800 today and promises to pay $2,100, $2,500, $2,500, $2,000 and $1,800 over the next 5 years. Or, Bill can invest $6,800 in ject B that promises to pay $1,500, $1,500, $1,500, $3,500 and $3,900 over the next 5 years. (Hint: For mixed stream cash inflows, calculate cumulative cash inflows on a year-to-year basis until the initial investment is recovered.) How long will it take for Bill to recoup his initial investment in project A? How long will it take for Bill to recoup his initial investment in project B? Using the payback period, which project should Bill choose? Do you see any problems with his choice?

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

See similar textbooks

Similar questions

Payback Period < Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows. a. Colby Hepworth has just invested $600,000 in a book and video store. She expects to receive a cash income of $120,000 per year from the investment. b. Kylie Sorensen has just invested $1,640,000 in a new biomedical technology. She expects to receive the following cash flows over the next 5 years: $350,000, $490,000, $820,000, $520,000, and $300,000. c. Carsen Nabors invested in a project that has a payback period of 4 years. The project brings in $960,000 per year. d. Rahn Booth invested $1,400,000 in a project that pays him an even amount per year for 5 years. The payback period is 2.5 years. Required: 1. What is the payback period for Colby? Round your answer to two decimal places. 5 years 2. What is the payback period for Kylie? Round your answer to one decimal place. years 3. How much did Carsen invest in the project? $ 4. How much cash does Rahn receive each…
Porter Company is analyzing two potential Investments. Project X $ 97,090 Initial investment Net cash flow: Year 1 Year 2 Year 3 Year 4 Multiple Choice If the company is using the payback period method, and it requires a payback of three years or less, which project(s) should be selected? O 32,500 32,500 32,500 0 Both X and Y are acceptable projects. O Project Y. Project Y $ 77,000 Project Y because it has a lower Initial Investment. Project X 5,700 34,500 34,500 25,000 Neither X nor Y is an acceptable project.
Time Value Personal Finance Problem Misty needs to have $16,000 in 8 years to fulfill her goal of purchasing a small sailboat. She is willing to invest a lump sum today and leave the money untouched for 8 years until it grows to $16,000 , but she wonders what sort of investment return she will need to earn to reach her goal. Use your calculator or spreadsheet to figure out the approximate annually compounded rate of retum needed if she can invest $11,500 today. The annually compounded rate of return Misty needs to earn to reach her goal is \%. (Round to two decimal piaces.)
Payback Period Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows. Colby Hepworth has just invested $500,000 in a book and video store. She expects to receive a cash income of $120,000 per year from the investment. Kylie Sorensen has just invested $1,540,000 in a new biomedical technology. She expects to receive the following cash flows over the next 5 years: $350,000, $490,000, $770,000, $490,000, and $280,000. Carsen Nabors invested in a project that has a payback period of 4 years. The project brings in $960,000 per year. Rahn Booth invested $1,550,000 in a project that pays him an even amount per year for 5 years. The payback period is 2.5 years. Required: 1. What is the payback period for Colby? Round your answer to two decimal places.years 2. What is the payback period for Kylie? Round your answer to one decimal place.years 3. How much did Carsen invest in the project? $ 4. How much cash does Rahn receive each year? $per year
Payback Period Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows. Colby Hepworth has just invested $575,000 in a book and video store. She expects to receive a cash income of $120,000 per year from the investment. Kylie Sorensen has just invested $1,600,000 in a new biomedical technology. She expects to receive the following cash flows over the next 5 years: $350,000, $490,000, $800,000, $510,000, and $290,000. Carsen Nabors invested in a project that has a payback period of 4 years. The project brings in $960,000 per year. Rahn Booth invested $1,500,000 in a project that pays him an even amount per year for 5 years. The payback period is 2.5 years. Required: 1. What is the payback period for Colby? Round your answer to two decimal places.years 2. What is the payback period for Kylie? Round your answer to one decimal place.years 3. How much did Carsen invest in the project? $ 4. How much cash does Rahn receive each year? $per year
Time to accumulate a given sum Personal Finance Problem Manuel Rios wishes to determine how long it will take an initial deposit of $7,000 to double. a. If Manuel earns 8% annual interest on the deposit, how long will it take for him to double his money? b. How long will it take if he earns only 5% annual interest? c. How long will it take if he can earn 10% annual interest? d. Reviewing your findings in parts a, b, and c, indicate what relationship exists between the interest rate and the amount of time it will take Manuel to double his money. a. If Manuel earns 8% annual interest, the amount of time to double his money is years. (Round to two decimal places.) C
Example: Evaluating a business investment opportunity • A low-risk, 4-year investment opportunity promises to pay $3,000, $6,000, and $5,000 at the end of the first, second and fourth year, respectively. A cash injection of $1,000 is required at the end of the third year. The investment may be purchased for $10,000, which would have to be borrowed at an effective interest rate of 10%. Use Economic Value Added principle to determine whether the investment should be undertaken.
Suppose an investor, Erik, is offered the investment opportunities described in the table below. Each investment costs $1,000 today and provides a payoff, also described below, one year from now. Option Payoff One Year from Now 1 100% chance of receiving $1,100 2 50% chance of receiving $1,000; 50% chance of receiving $1,200 3 50% chance of receiving $200; 50% chance of receiving $2,000 If Erik is risk averse, which investment will he prefer? The investor will choose option 1. The investor will choose option 2. The investor will choose option 3. The investor will be indifferent toward these options. Which kind of stock is most affected by changes in risk aversion? High-beta stocks Low-beta stocks All stocks are affected the same, regardless of beta. Medium-beta stocks
Asset valuation and risk Personal Finance Problem Laura Drake wishes to estimate the value of an asset expected to provide cash inflows of $3,800 for each of the next 4 years and $18,194 in 5 years. Her research indicates that she must earn 3% on low-risk assets, 6% on average-risk assets, and 16% on high-risk assets. a. Determine what is the most Laura should pay for the asset if it is classified as (1) low-risk, (2) average-risk, and (3) high-risk. b. Suppose Laura is unable to assess the risk of the asset and wants to be certain she's making a good deal. On the basis of your findings in part a, what is the most she should pay? Why? c. All else being the same, what effect does increasing risk have on the value of an asset? Explain in light of your findings in part a. (Round to the nearest cent.) a. (1) The most Laura should pay for the asset if it is classified as low-risk is $ (2) The most Laura should pay for the asset if it is classified as average-risk is $. (Round to the nearest…
URE ic Gail Trevino expects to receive a $580,000 cash benefit when she retires seven years from today. Ms. Trevino's employer has offered an early retirement incentive by agreeing to pay her $310,000 today if she agrees to retire immediately. Ms. Trevino desires to earn a rate of return of 10 percent. (PV of $1& and PVA of $1) Note: Use appropriate factor(s) from the tables provided. raw Required a. Calculate the present value of the $580,000 future cash benefit. Assuming that the retirement benefit is the only consideration in making the retirement decision, should Ms. Trevino accept her employer's offer? Note: Round your final answer to the nearest whole dollar value. Present value Should Ms. Trevino accept the offer?
Challenge question II. Tyler wants to buy a beach house as part of his investment portfolio. After searching the coast for a nice home, he finds a house with a great view and a hefty price of $3,000,000. Tyler will need to borrow from the bank to pay for this house. Mortgage rates are based on the length of the loan, and a local bank is advertising fifteen-year loans with monthly payments at 7.25%, twenty-year loans with monthly payments at 7.5%, and thirty-year loans with monthly payments at 7.625%. What is the monthly payment of principal and interest for each loan? Tyler believes that the property will be worth $3,500,000 in seven years. Ignoring taxes and real estate commissions, if Tyler sells the house after seven years, what will be the difference in the selling price and the remaining principal on the loan for each of the three loans? t If Tyler selects fifteen-year loan with monthly payments at 7.25%, what is the monthly payment? (Round to the nearest cent.) $
You calculate that you will need $75,000 in ten years to be able to pay for your daughter's college education. If you invest $20,000 today, what rate of return will you need to achieve this goal? Select one: A. Between 12% and 13% B. Between 13% and 14% C. Between 14% and 15% D. Between 15% and 16%

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS