(a)Rahman is considering to independent projects, Project A and Project B. Theinitial cash outlay associated with Project A is RM50,000 and the projectwould generate cash flows of RM12,000 per year for six years. While theinitial outlay for Project B would be RM70,000 with generate cash flows ofRM13,000 per year for ten years. The discount rate on both projects is 12percent. Calculate Internal Rate of Return (IRR) for each project and indicateif the project should be accepted or not.3.

Internal rate of return refers to the rate at which the net present value of a project is zero. In…

Answered: Rahman is considering to 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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The Butler-Perkins Company (BPC) must decide between two mutually exclusive projects. Each costs $7,000 and has an expected life of 3 years. Annual project cash flows begin 1 year after the initial investment and are subject to the following probability distributions: Project A Project B Probability Cash Flows Probability Cash Flows 0.2 $6,250 0.2 $0 0.6 $7,000 0.6 $7,000 0.2 $7,750 0.2 $19,000 BPC has decided to evaluate the riskier project at 12% and the less-risky project at 10%. a. What is each project's expected annual cash flow? Round your answers to two decimal places. Project A: $ Project B: $ Project B's standard deviation (σB) is $6,131.88 and its coefficient of variation (CVB) is 0.77. What are the values of (σA) and (CVA)? Round your answers to two decimal places. σA = $ CVA = b. Based on the risk-adjusted NPVs, which project should BPC choose? c. If you knew that Project B's cash flows were negatively correlated with the firm's other cash flow, but Project A's cash flows…
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ABC Corporation is considering an investment project proposal that requires an initial outlay of RM500,000. The project is expected to provide net cash inflows of RM125,000 in year 1, RM250,000 in year 2, RM300,000 in year 3, RM225,000 in year 4, RM100,000 in year 5, RM25,000 in year 6 and RM0 in year 7. (a) Compute the payback period for the project.(b) Compute the net present value of the project if the firm estimates its cost of capital to be 14%. Based on the project’s net present value, should Awesome Corporation make thisinvestment? Why?(c) Why is net present value considered to be a superior method of evaluating the cash flows from a project?(d) Evidence suggests that in spite of the theoretical superiority of net present value, financial managers use the internal rate of return approach just as often as the net present value method.Discuss the above statement.
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