Present Value Index When funds for capital investments are limited, projects can be ranked using a present value index. A project with net present value may, in fact, return a lower present value per dollar invested. negative net present value will have a present value index below 1.0. Also, it is important to note that a project with the largest Let's look at an example of how to determine the present value index. The company has a project with a 5-year life, an initial investment of $170,000, and is expected to yield annual cash flows of $58,000. Whathat is the present value index of the project if the required rate of return is set at 6%? Total present value of net cash flows Present value index Initial investment Calculation Steps Note: Round total present value of net cash flows and initial investment nearest dollar. Round present value index to two decimal places. Present value index =

Present Value Index When funds for capital investments are limited, projects can be ranked using a present value index. A project with net present value may, in fact, return a lower present value per dollar invested. negative net present value will have a present value index below 1.0. Also, it is important to note that a project with the largest Let's look at an example of how to determine the present value index. The company has a project with a 5-year life, an initial investment of $170,000, and is expected to yield annual cash flows of $58,000. Whathat is the present value index of the project if the required rate of return is set at 6%? Total present value of net cash flows Present value index Initial investment Calculation Steps Note: Round total present value of net cash flows and initial investment nearest dollar. Round present value index to two decimal places. Present value index =

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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5) Brady Brand is evaluating a project with the given cash flow and weighted average cost of capital (WACC) information. Can you determine the project's modified internal rate of return (MIRR)? Keep in mind that the MIRR can be lower than the WACC, or even negative, indicating that the project is not viable and should be rejected. WACC: 10.00% Year Cash flows 0 1 -$850 $300 2 $320 3 $340 4 $360
A firm evaluates all of its projects by applying the IRR rule. A project under consideration has the following cash flows: Year Cash Flow 0 $27,700 1 11,700 14,700 3 10,700 If the required return is 18 percent, what is the IRR for this project? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) IRR % Should the firm accept the project? Yes No
The capital budgeting decision that requires a choice between two decisions is a(n) _______ project. Independent Dependent Mutually exclusive Inclusive The actual value that a firm loses when it makes a capital budgeting decision is a(n) ______ cost Fixed Opportunity Sample Unknown The number of years required for an investment to return the monies invested is known as a projects Economic life Usage rate Capital decision Payback period The future benefits received from investing in a project are the projects Net cash flows Net investment Net cost Net return The capital components included in a firms weighted cost of capital are Common stock Debt Retained earnings All of the above Weaknesses in using solely the payback method as a measure of a projects risk include Not accounting for the time value of money There is no objective criterion for deciding what is an acceptable payback period Cash flows that occur after the payback period have no impact on the…
Net present value Using a cost of capital of 15%, calculate the net present value for the project shown in the following table and indicate whether it is acceptable, The net present value (NPV) of the project is $. (Round to the nearest cent.) Is the project acceptable? (Select the best answer below.) O Yes No Data table (Click on the icon here in order to copy the contents of the data table below a spreadsheet.) Initial investment (CF) Year (0) 1 2 3 4 5 6 7 8 9 10 -1,156,000 Cash inflows (CF) $75,000 $140,000 $192,000 $254,000 $313,000 $378,000 $271,000 $97,000 $49,000 $26,000
Wolff Enterprises must consider one investment project using the capital asset pricing model (CAPM). Relevant information is presented in the following table. Item Rate of return Beta, b Risk-free asset 9% 0.00 Market portfolio 14% 1.00 Project 1.74 a. Calculate the required rate of return for the project, given its level of nondiversifiable risk. b. Calculate the risk premium for the project, given its level of nondiverisifiable risk.
Internal rate of return and modified internal rate of return For the project shown in the following table,, calculate the internal rate of return (IRR) and modified internal rate of return (MIRR). If the cost of capital is 12.13%, indicate whether the project is acceptable according to IRR and MIRR. The project's IRR is %. (Round to two decimal places.) Data table (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) Initial investment (CF) Year (t) 1 2 3 4 5 Print $70,000 Cash inflows (CFt) $15,000 $25,000 $25,000 $15,000 $10,000 Done X
Diana, Industries is considering a project which has the following cash flows: Year Cash Flow 0 ? 1 $4,000 2 4,000 3 3,000 4 1,500 The project has a payback period of 2.5 years. The firm’s cost of capital is 12 percent. What is the project’s net present value (NPV)? What does the NPV rule advice regarding this investment opportunity?
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The WACC is used as the discount rate to evaluate various capital budgeting projects. However, it is important to realize that the WACC is an appropriate discount rate only for a project of average risk. Analyze the cost of capital situations of the following company cases, and answer the specific questions that finance professionals need to address. Consider the case of Turnbull Co. Turnbull Co. has a target capital structure of 45% debt, 4% preferred stock, and 51% common equity. It has a before-tax cost of debt of 11.1%, and its cost of preferred stock is 12.2%. If Turnbull can raise all of its equity capital from retained earnings, its cost of common equity will be 14.7%. However, if it is necessary to raise new common equity, it will carry a cost of 16.8%. If its current tax rate is 25%, how much higher will Turnbull’s weighted average cost of capital (WACC) be if it has to raise additional common equity capital by issuing new common stock instead of raising the…
Put answer in table format Yokam Company is considering two alternative projects. Project 1 requires an initial investment of $560,000 and has a present value of cash flows of $2,200,000.0. Project 2 requires an initial investment of $5,000,000 and has a present value of cash flows of $7,000,000. 1. Compute the profitability index for each project.2. Based on the profitability index, which project should the company prefer?
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A company is considering three alternative Investment projects with different net cash flows. The present value of net cash flows is calculated using Excel and the results follow. Potential Projects Present value of net cash flows (excluding initial investment) Initial investment Complete this question by entering your answers in the tabs below. a. Compute the net present value of each project. b. If the company accepts all positive net present value projects, which of these will It accept? c. If the company can choose only one project, which will it choose on the basis of net present value? Required A Required B Compute the net present value of each project. Potential Projects Project A Present value of net cash flows Initial investment Net present value Required C Project E Project C $10,685 (10,000)