The profitability index (PI) is a capital budgeting tool that is defined as the present value of a project's cash inflows divided by the absolute value ofits initial cash outflow. Consider this case:Blue Moose Home Builders is considering investing $2,500,000 in a project that is expected to generate the following net cash flows:YearCash FlowYear 1$325,000Year 2$475,000Year 3Year 4$500,000$500,000Blue Moose Home Builders uses a WACC of 7% when evaluating proposed capital budgeting projects. Based on these cash flows, determine thisproject's PI (rounded to four decimal places)0.57310.63350.6033O 0.7240Blue Moose Home Builders's decision to accept or reject this project is independent of its decisions on other projects. Based on the project's PI, thefirm shouldthe project.By comparison, the NPV of this project isin the project because the projectA project with a negative NPV will have a PI that is. On the basis of this evaluation criterion, Blue Moose Home Builders shouldincrease the firm's value.; when it has a PI of 1.0, it will have an NPV

Project's Profitability Index (PI) = 0.6033So, the correct answer is C) 0.6033 Blue Moose Home…

Answered: The profitability index (PI) is a…

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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Your firm is evaluating a capital budgeting project. The estimated cash flows appear below. The board of directors wants to know the expected impact on shareholder wealth. Knowing that the estimated impact on shareholder wealth equates to net present value (NPV), you use your handy calculator to compute the value. What is the project's NPV? Assume that the cash flows occur at the end of each year. The discount rate (i.e., required rate of return, hurdle rate) is 15.4%. (Round to nearest penny) Year O cash flow Year 1 cash flow Year 2 cash flow Year 3 cash flow Year 4 cash flow Year 5 cash flow Answer: -113,000 45,000 34,000 58,000 33,000 35,000
Make a CashFlow projection of 10 million rupees investiment in some project ABC for the next 7 years. Recall following topics you have covered in your course: i) Capital Budgeting Techniques ii) Cash flow Estination. Apply all the techniques on your cash flow projections for decision making Assume required rate of return is 15% . Capital Budgeting Techniques: Payback Period. Discounted Payback Period Net Present Value . Internal Rate of Return Modified Internal Rate of Return Average Accounting Return
2. Internal rate of return (IRR) The internal rate of return (IRR) refers to the compound annual rate of return that a project generates based on its up-front cost and subsequent cash flows. Consider this case: Blue Llama Mining Company is evaluating a proposed capital budgeting project (project Delta) that will require an initial investment of $1,600,000. Blue Llama Mining Company has been basing capital budgeting decisions on a project's NPV; however, its new CFO wants to start using the IRR method for capital budgeting decisions. The CFO says that the IRR is a better method because percentages and returns are easier to understand and to compare to required returns. Blue Llama Mining Company's WACC is 10%, and project Delta has the same risk as the firm's average project. The project is expected to generate the following net cash flows: Year Year 1 Year 2 Year 3 Year 4 Cash Flow $350,000 $475,000 $425,000 $500,000 Which of the following is the correct calculation of project Delta's…
The internal rate of return (IRR) refers to the compound annual rate of return that a project generates based on its up-front cost and subsequent cash flows. Consider the case of Blue Llama Mining Company: Blue Llama Mining Company is evaluating a proposed capital budgeting project (project Sigma) that will require an initial investment of $900,000. Blue Llama Mining Company has been basing capital budgeting decisions on a project’s NPV; however, its new CFO wants to start using the IRR method for capital budgeting decisions. The CFO says that the IRR is a better method because returns in percentage form are easier to understand and compare to required returns. Blue Llama Mining Company’s WACC is 9%, and project Sigma has the same risk as the firm’s average project. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $300,000 Year 2 $425,000 Year 3 $475,000 Year 4 $450,000 Which of the following is the correct…
please solve these pratice problems
Explain well with step by step type the answer.
Your firm is evaluating a capital budgeting project. The estimated cash flows appear below. The board of directors wants to know the expected impact on shareholder wealth. Knowing that the estimated impact on shareholder wealth equates to net present value (NPV), you use your handy calculator to compute the value. What is the project's NPV? Assume that the cash flows occur at the end of each year. The discount rate (i.e., required rate of return, hurdle rate) is 17.5%. (Round to nearest penny) Year 0 cash flow -115,000 Year 1 cash flow 60,000 Year 2 cash flow 47,000 Year 3 cash flow 48,000 Year 4 cash flow 51,000 Year 5 cash flow 27,000
Answer the given question with a proper explanation and step-by-step solution. Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 7%. 0 1 2 3 4 Project A -1,000 600 440 210 260 Project B -1,000 200 375 360 710 What is Project A's payback? Do not round intermediate calculations. Round your answer to four decimal places. ____ years What is Project A's discounted payback? Do not round intermediate calculations. Round your answer to four decimal places. ______ years What is Project B's payback? Do not round intermediate…
The internal rate of return (IRR) refers to the compound annual rate of return that a project generates based on its up-front cost and subsequent cash flows. Consider this case: Blue Llama Mining Company is evaluating a proposed capital budgeting project (project Delta) that will require an initial investment of $1,400,000. Blue Llama Mining Company has been basing capital budgeting decisions on a project’s NPV; however, its new CFO wants to start using the IRR method for capital budgeting decisions. The CFO says that the IRR is a better method because percentages and returns are easier to understand and to compare to required returns. Blue Llama Mining Company’s WACC is 7%, and project Delta has the same risk as the firm’s average project. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $300,000 Year 2 $425,000 Year 3 $400,000 Year 4 $425,000 Q1. Which of the following is the correct calculation of project Delta’s…
Suppose Hungry Whale Electronics is evaluating a proposed capital budgeting project (project Alpha) that will require an initial investment of $450,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $350,000 Year 2 $450,000 Year 3 $400,000 Year 4 $475,000 Hungry Whale Electronics'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 present value (NPV)? $959,045 $1,309,045 $1,409,045 $1,150,854
Suppose a company has the following three projects and limits it capital budget to $50,000. Projects Present Value of Cash Inflows Initial Investment A $40,000 $25,000 B 37,500 25,000 70,000 50,000 1. Calculate the projects' NPVs. 2. Calculate the projects' PIs. 3. Which project(s) should the company choose? Why?
2. Internal rate of return (IRR) The internal rate of return (IRR) refers to the compound annual rate of return that a project generates based on its up-front cost and subsequent cash flows. Consider the case of Falcon Freight: Falcon Freight is evaluating a proposed capital budgeting project (project Sigma) that will require an initial investment of $800,000. Falcon Freight has been basing capital budgeting decisions on a project’s NPV; however, its new CFO wants to start using the IRR method for capital budgeting decisions. The CFO says that the IRR is a better method because returns in percentage form are easier to understand and compare to required returns. Falcon Freight’s WACC is 7%, and project Sigma has the same risk as the firm’s average project. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $275,000 Year 2 $400,000 Year 3 $500,000 Year 4 $400,000 Which of the following is the correct calculation of…

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