13. The IBC Company is considering undertaking an investment that promises to have the following cash flows: Perlod 0 Perlod 1 Perlod 2 Perlod 3 -$100 $150 $50 $50 If it waits a year, it can invest in an alternative (that is, mutually exclusive) investment that promises to pay Period 1 -$150 Period 2 $250 Period 3 $50 Assume a time value of money of 0.05. Which investment should the firm undertake? Use the present value method and the internal rate of return approaches. With the IRR approach, use the incremental cash flows.
13. The IBC Company is considering undertaking an investment that promises to have the following cash flows: Perlod 0 Perlod 1 Perlod 2 Perlod 3 -$100 $150 $50 $50 If it waits a year, it can invest in an alternative (that is, mutually exclusive) investment that promises to pay Period 1 -$150 Period 2 $250 Period 3 $50 Assume a time value of money of 0.05. Which investment should the firm undertake? Use the present value method and the internal rate of return approaches. With the IRR approach, use the incremental cash flows.
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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#13 is the question
Transcribed Image Text:A. Bookshelf - The Capital Budget x
1 VitalSource Bookshelf: The Cap x
b My Questions | bartleby
Week 2 Assignment
G The IBC Company is consideri
+
A online.vitalsource.com/#/books/9781135656232/cfi/6/24!/4/272/10/22/2/2/2/2@0:43.3
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-10,000
6,151
$6,151
B
4. Mutually Exclusive...
-10,000
13,226
Go to 4. Mutually Exclusive
Investments
b. Compute the amount the investor will have at time 2 if the funds received at time 1 can be reinvested to earn 0.15.
C. For each of the three investments, graph the present value profile.
d. Which investment is to be preferred if the rate of discount is 0.10?
Reinvestment rate of return
12. The ABC Company is considering undertaking an investment that promises to have the following cash flows: period 0, -$50; period 1, $90. If
the firm waits a year, it can invest in an alternative (that is, mutually exclusive) investment that promises to pay -$60 in period 1 and $100 in
period 2. Assume a time value of money of 0.05.
Which investment should the firm undertake? Use the net present value and the internal rate of return methods.
13. The IBC Company is considering undertaking an investment that promises to have the following cash flows:
Loan-type flows
Multiple internal rates of return
Perlod 0
Perjod 1
Perlod 2
Perlod 3
Interpretation of multiple IRRS
-$100
$150
$50
$50
A "paradox"
If it waits a year, it can invest in an alternative (that is, mutually exclusive) investment that promises to pay
Period 1
-$150
Period 2
$250
Period 3
$50
Converting multiple IRRS to a single
IRR
Assume a time value of money of 0.05.
Which investment should the firm undertake? Use the present value method and the internal rate of return approaches. With the IRR
approach, use the incremental cash flows.
14. The Arabian Oil Company is considering an investment that can be undertaken this year or postponed one year. The investment cash flows if
the investment is undertaken now would be as follows: period 0, -$100; period 1, $200. The cash flows if it is delayed one period would be as
follows: period 1, -$100; period 2, $200. Assume a time value of money of 0.05.
Should the company invest now or delay one year? First use the internal rate of return method and then use the net present value method.
15. The IBC Company is considering undertaking an investment that promises the following cash flows:
Significance of nonconventional
cash flows
Ranking independent investments
Mutually exclusive alternatives with
Period 0
-5100
Period 1
$80
Period 2
$80
different risks
Duration: a sensitivity measure
If the company waits a year, it can make the following investment:
Why the internal rate of return
Period 1
Period
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Today is January 1, 2020. On the first day of the years 2021, 2022, 2023, and 2024, you will invest $12,000. If your expected
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