P10-24 All techniques: Decision among mutually exclusive investments Pound Industries is attempting to select the best of three mutually exclusive projects. The initial invest- ment and after-tax cash inflows associated with these projects are shown in the following table. Cash flows Project A Project B Project C Initial investment (CF) $60,000 $100,000 $110,000 Cash inflows (CF), 1 to 5 20,000 31,500 32,500 a. Calculate the payback period for each project. b. Calculate the net present value (NPV) of each project, assuming that the firm has a cost of capital equal to 13%. c. Calculate the internal rate of return (IRR) for each project. d. Draw the net present value profiles for both projects on the same set of axes, and discuss any conflict in ranking that may exist between NPV and IRR. e. Summarize the preferences dictated by each measure, and indicate which project you would recommend. Explain why.
P10-24 All techniques: Decision among mutually exclusive investments Pound Industries is attempting to select the best of three mutually exclusive projects. The initial invest- ment and after-tax cash inflows associated with these projects are shown in the following table. Cash flows Project A Project B Project C Initial investment (CF) $60,000 $100,000 $110,000 Cash inflows (CF), 1 to 5 20,000 31,500 32,500 a. Calculate the payback period for each project. b. Calculate the net present value (NPV) of each project, assuming that the firm has a cost of capital equal to 13%. c. Calculate the internal rate of return (IRR) for each project. d. Draw the net present value profiles for both projects on the same set of axes, and discuss any conflict in ranking that may exist between NPV and IRR. e. Summarize the preferences dictated by each measure, and indicate which project you would recommend. Explain why.
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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Transcribed Image Text:P10-24 All techniques: Decision among mutually exclusive investments Pound Industries is
attempting to select the best of three mutually exclusive projects. The initial invest-
ment and after-tax cash inflows associated with these projects are shown in the
following table.
Cash flows
Project A
Project B
Project C
Initial investment (CF)
$60,000
$100,000
$110,000
Cash inflows (CF), 1 to 5
20,000
31,500
32,500
a. Calculate the payback period for each project.
b. Calculate the net present value (NPV) of each project, assuming that the firm has
a cost of capital equal to 13%.
c. Calculate the internal rate of return (IRR) for each project.
d. Draw the net present value profiles for both projects on the same set of axes, and
discuss any conflict in ranking that may exist between NPV and IRR.
e. Summarize the preferences dictated by each measure, and indicate which project
you would recommend. Explain why.
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