Suppose the capital budget was $100,000. What is the NPV of the best project(s)? WACC=10.00% Fixed Budget =$250,000ProjectInitial Investment PV of Inflows NPVIRRPI-$80,000-$70,000$100,000$112,000$20,000$42,000A12.00%1.25B20.00%1,60-$100,000-$40,000$145,000$36,000$79,000$45,000-$4,00016.00%1.458.00%0.90-$60,000-$110,000$19,000$16,50015.00%1.32F$126,50011.00%1.15Ranking by NPVInvestment NPV$100,000ProjectInitial Investment PV of Inflows NPVIRRPIC-$100,000$145,000$45,00016.00%1.45$45,000-$70,000-$80,000-$60,000$42,000$20,000$87,000$107,000$112,000$170,000$250,00020.00%1.60A$100,00012.00%1.25$79,000$19,00015.00%1.32-$110,000-$40,000F$126,500$16,50011.00%1.15$36,000-$4,0008.00%0.90Ranking by IRR or PIProjectInitial Investment PV of Inflows NPVIRRPIInvestment NPV$42,000$70,000$170,000$230,000-$70,000-$100,000-$60,000-$80,000-$110,000-$40,000$42,000$87,000$106,000$112,00020.00%1.60$145,000$79,000$45,000$19,00016.00%1.45E15.00%1.32$100,000$20,00012.00%1.25$126,500$36,000$16,50011.00%1.15-$4,0008.00%0.90

The net present value is a discounted method of capital budgeting. It includes the present values of…

WACC= 10.00% Fixed Budget = $250,000 Project Initial Investment PV of Inflows NPV IRR PI A -$80,000 $100,000 $20,000 12.00% 1.25 $112,000 $145,000 $36,000 $42,000 $45,000 -$4,000 1.60 -$70,000 -$100,000 B 20.00% 16.00% 1.45 -$40,000 -$60,000 -$110,000 8.00% 0.90 E $79,000 $19,000 15.00% 1.32 F $126,500 $16,500 11.00% 1.15 Ranking by NPV Project Initial Investment PV of Inflows NPV IRR PI Investment NPV -$100,000 -$70,000 -$80,000 $145,000 $45,000 $42,000 $20,000 $100,000 $45,000 $87,000 16.00% 1.45 $112,000 $100,000 20.00% 1.60 $170,000 A 12.00% 1.25 $250,000 $107,000 -$60,000 -$110,000 -$40,000 $79,000 $126,500 $36,000 E $19,000 15.00% 1.32 $16,500 -$4,000 F 11.00% 1.15 D 8.00% 0.90 Ranking by IRR or PI Project Initial Investment PV of Inflows NPV IRR PI Investment NP -$70,000 -$100,000 -$60,000 $112,000 $145,000 $42,000 $45,000 $19,000 $70,000 $42,000 $87,000 $106,000 B 20.00% 1.60 $170,000 $230,000 16.00% 1.45 $79,000 $100,000 $126,500 E 15.00% 1.32 -$80,000 -$110,000 $20,000 $16,500 -$4,000 A 12.00% 1.25 11.00% 1.15 D -$40,000 $36,000 8.00% 0.90

WACC= 10.00% Fixed Budget = $250,000 Project Initial Investment PV of Inflows NPV IRR PI A -$80,000 $100,000 $20,000 12.00% 1.25 $112,000 $145,000 $36,000 $42,000 $45,000 -$4,000 1.60 -$70,000 -$100,000 B 20.00% 16.00% 1.45 -$40,000 -$60,000 -$110,000 8.00% 0.90 E $79,000 $19,000 15.00% 1.32 F $126,500 $16,500 11.00% 1.15 Ranking by NPV Project Initial Investment PV of Inflows NPV IRR PI Investment NPV -$100,000 -$70,000 -$80,000 $145,000 $45,000 $42,000 $20,000 $100,000 $45,000 $87,000 16.00% 1.45 $112,000 $100,000 20.00% 1.60 $170,000 A 12.00% 1.25 $250,000 $107,000 -$60,000 -$110,000 -$40,000 $79,000 $126,500 $36,000 E $19,000 15.00% 1.32 $16,500 -$4,000 F 11.00% 1.15 D 8.00% 0.90 Ranking by IRR or PI Project Initial Investment PV of Inflows NPV IRR PI Investment NP -$70,000 -$100,000 -$60,000 $112,000 $145,000 $42,000 $45,000 $19,000 $70,000 $42,000 $87,000 $106,000 B 20.00% 1.60 $170,000 $230,000 16.00% 1.45 $79,000 $100,000 $126,500 E 15.00% 1.32 -$80,000 -$110,000 $20,000 $16,500 -$4,000 A 12.00% 1.25 11.00% 1.15 D -$40,000 $36,000 8.00% 0.90

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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Question

Suppose the capital budget was $100,000. What is the NPV of the best project(s)?

WACC=
10.00% Fixed Budget =
$250,000
Project
Initial Investment PV of Inflows NPV
IRR
PI
-$80,000
-$70,000
$100,000
$112,000
$20,000
$42,000
A
12.00%
1.25
B
20.00%
1,60
-$100,000
-$40,000
$145,000
$36,000
$79,000
$45,000
-$4,000
16.00%
1.45
8.00%
0.90
-$60,000
-$110,000
$19,000
$16,500
15.00%
1.32
F
$126,500
11.00%
1.15
Ranking by NPV
Investment NPV
$100,000
Project
Initial Investment PV of Inflows NPV
IRR
PI
C
-$100,000
$145,000
$45,000
16.00%
1.45
$45,000
-$70,000
-$80,000
-$60,000
$42,000
$20,000
$87,000
$107,000
$112,000
$170,000
$250,000
20.00%
1.60
A
$100,000
12.00%
1.25
$79,000
$19,000
15.00%
1.32
-$110,000
-$40,000
F
$126,500
$16,500
11.00%
1.15
$36,000
-$4,000
8.00%
0.90
Ranking by IRR or PI
Project
Initial Investment PV of Inflows NPV
IRR
PI
Investment NPV
$42,000
$70,000
$170,000
$230,000
-$70,000
-$100,000
-$60,000
-$80,000
-$110,000
-$40,000
$42,000
$87,000
$106,000
$112,000
20.00%
1.60
$145,000
$79,000
$45,000
$19,000
16.00%
1.45
E
15.00%
1.32
$100,000
$20,000
12.00%
1.25
$126,500
$36,000
$16,500
11.00%
1.15
-$4,000
8.00%
0.90

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how to Calculate and use the major capital budgeting decision criteria, which are NPV, IRR, MIRR, and payback.
Question: Which of the following methods of capital budgeting accounts for the time value of money? Options: A) Net Present Value (NPV) B) Payback Period C) Accounting Rate of Return (ARR) D) Profitability Index (PI)
Please describe NPV, IRR and their relationship. How do you evaluate each for making an investment decision? That is, what is a favorable NPV and IRR for making an investment decision. If you were developing a capital budgeting process at your employer, how would you prioritize your projects? What is the NPV when IRR = WACC, IRR>WACC, and IRR<WACC? There is a duplex for sale in Absecon for $700,000 at this time. It has 2 units that generate a total of $25,000 in gross rent. The property taxes are $4,000, commercial property insurance is $2,000, flood insurance is $1,000, and annual maintenance is $2,000. You expect to sell it in one year at a price growth of 0%. What is the NPV with a WACC of 10%. Is the IRR greater or less than the WACC? Would you invest in this project and why?
In the above $110K allocation problem, you decided to allocate 30% weight in A, 50% weight in B, 20% weight in C, and you want to find its AVG return. Which of the following is the appropriate method to find the mean (AVG) return on the $100K fund invested? a. Weighted Average (WAVG ) b. Simple Average c. Geometric Average d. Arithmetic Average
2. Match each of the following terms with the appropriate definition. The time expected to recover the cash initially invested in a project. A minimum acceptable rate of return on a potential investment. 1. Discounting A return on investment which results in a zero net present value. 2. Net Present Value A comparison of the cost of 3. Capital Budgeting an investment to its projected cash flows at a single point in time. 4. Accounting Rate of Return 5. Net Cash Flow A capital budgeting method focused on the rate of return on a project's average investment. 6. Internal Rate of Return 7. Payback Period The process of restating future cash flows in terms 8. Hurdle Rate of present time value. Cash inflows minus cash outflows for the period. A process of analyzing alternative long-term investments. >
In a few sentences, answer the following question as completely as you can. Compare discounted cash flow (DCF) and non-discounted cash flow capital budgeting techniques. If you were to evaluate a project, which one of these techniques would you use?
Click on the quadrant that will yield the best capital budgeting decision. - NPV Hi IRR Low IRR + NPV
e. Estimate the required net operating working capital (NOWC) for each year and the cash flow due to changes in NOWC. f. Calculate the after-tax salvage cash flow. g. Calculate the project cash flows for each year. Based on these cash flows and the average project cost of capital, what are the project’s NPV, IRR, MIRR, PI, payback, and discounted payback? Do these indicators suggest that the project should be undertaken?

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