X-treme Vitamin Company is considering two investments, both of which cost $10,000. The cash flows are as follows: NOTE: you must show your work for ALL steps for full credit. Year Proj A Proj B 1 $ 12,000.00 $10,000.00 2 $8,000.00 $6,000.00 3 $ 6,000.00 $16,000.00 a. Which of the two projects should be chosen based on the payback method b. Which of the two projects should be chosen based on the net present value method? Assume a cost of capital of 10 percent. c. Should a firm normally have more confidence in answer a or answer b.

X-treme Vitamin Company is considering two investments, both of which cost $10,000. The cash flows are as follows: NOTE: you must show your work for ALL steps for full credit. Year Proj A Proj B 1 $ 12,000.00 $10,000.00 2 $8,000.00 $6,000.00 3 $ 6,000.00 $16,000.00 a. Which of the two projects should be chosen based on the payback method b. Which of the two projects should be chosen based on the net present value method? Assume a cost of capital of 10 percent. c. Should a firm normally have more confidence in answer a or answer b.

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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You are debating whether or not to invest in your best friend's business idea, so use IRR to evaluate the project: a. Cost of Capital: 10% b. Initial Investment: -Rs. 200 Mn C. Cash Flows over the past 5 years: ■ Years 1 & 2: Rs. 50 MN ■ Years 3 & 4: Rs. 100 Mn ■ Year 5: RS. 125 Mn What is the Answer (a) 15.36% (b) 30.20% (c) -17.29% (d) 26.04% (e) none of the above
The investment committee of Sentry Insurance Co. is evaluating two projects, office expansion and upgrade to computer servers. The projects have different useful lives, but each requires an investment of $838,000. The estimated net cash flows from each project are as follows: Net Cash Flow Year Office Expansion Server 1 $234,000 $309,000 2 234,000 309,000 3 234,000 309,000 4 234,000 309,000 5 234,000 6 234,000 The committee has selected a rate of 15% for purposes of net present value analysis. It also estimates that the residual value at the end of each project's useful life is $0, but at the end of the fourth year, the office expansion's residual value would be $293,000. Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 0.890 0.826 0.797 0.756 0.694 3 0.840 0.751 0.712 0.658 0.579 4 0.792 0.683 0.636 0.572 0.482 5 0.747 0.621 0.567 0.497 0.402 6 0.705 0.564 0.507 0.432 0.335 7 0.665…
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The investment committee of Sentry Insurance Co. is evaluating two projects, office expansion and upgrade to computer servers. The projects have different useful lives, but each requires an investment of $490,000. The estimated net cash flows from each project are as follows: Net Cash Flows Year Office Expansion Servers 1 $125,000 $165,000 2 125,000 165,000 3 125,000 165,000 4 125,000 165,000 5 125,000 6 125,000 The committee has selected a rate of 12% for purposes of net present value analysis. It also estimates that the residual value at the end of each project's useful life is $0, but at the end of the fourth year, the office expansion's residual value would be $180,000. Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 0.890 0.826 0.797 0.756 0.694 3 0.840 0.751 0.712 0.658 0.579 4 0.792 0.683 0.636 0.572 0.482 5 0.747 0.621 0.567 0.497 0.402 6 0.705 0.564 0.507 0.432…
Motor City Productions sells original automotive art on a prepaid basis as each piece is uniquely designed to the customer's specifications. For one project, the cash flows are estimated as follows. Based on the internal rate of return (IRR), should this project be accepted if the required return is 9 percent? Year Cash flow 0 $5500 1 -$5900 (Hint: You may or may not be able to use the simple default IRR rule) (a) IRR is 7.27%. Accept the project. (b) IRR is 7.27%. Reject the project. (c) IRR is 9%. Accept the project. (d) IRR is 9%. Reject the project.
X-treme Vitamin Company is considering two investments, both of which cost $34,000. The cash flows are as follows: $ 36,000 Project B $ 34,000 16,000 18,000 16,000 10,000 Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. a-1. Calculate the payback period for Project A and Project B. Note: Round your answers to 2 decimal places. Year Project A 1 2 3 Project A Project B a-2. Which of the two projects should be chosen based on the payback method? Project A O Project B Payback Period year(s) year(s) b-1. Calculate the net present value for Project A and Project B. Assume a cost of capital of 12 percent. Note: Do not round intermediate calculations and round your final answers to 2 decimal places. Project A Project B Net Present Value
Following is information on two alternative investments. Beachside Resort is considering building a new pool or spa. The company requires a 10% return from its investments. Initial investment Net cash flows in: Year 1 40,000 Year 2 56,000 Year 3 80,295 Year 4 90,400 Year 5 65,000 Compute the internal rate of return for each of the projects using excel functions. (Round your answers to 2 decimal places.) Pool Spa IRR Pool Spa $ (160,000) $ (105,000) % % 32,000 50,000 66,000 72,000 24,000
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Following is information on two alternative investments. Beachside Resort is considering building a new pool or spa. The company requires a 12% return from its investments. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) Initial investment Pool $ (174,325) Spa $ (155,960) Net cash flows in: Year 1 54,000 28,000 Year 2 43,000 51,000 Year 3 76,295 58,000 Year 4 88,400 80,000 Year 5 65,000 19,000 a. For each investment project compute the net present value. b. For each investment project compute the profitability index. c. If the company can only select one project, which should it choose on the basis of profitability index? Complete this question by entering your answers in the tabs below. Req A Req B and C For each investment project compute the net present value. Pool Net Cash Flows x Present Value Year 1 Year 2 Year 3 Year 4 Year 5 Totals Spa Net Cash Flows X Present Value Year 1 Year 2 Year 3 Year 4 Year 5 Totals = = = = = = =…
Morrisey Company has two investment opportunities. Both investments cost $6,900 and will provide the same total future cash inflows. The cash receipt schedule for each investment is given below: Investment I Investment II Period 1 $ 1,950 $ 1,950 Period 2 1,950 3,140 Period 3 2,950 4,330 Period 4 5,520 2,950 Total $12,370 $12,370 What is the net present value of Investment Il assuming an 12% minimum rate of return? (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided. Do not round your intermediate calculations. Round your answer to the nearest whole dollar.) Multiple Choice $2,301 $9,201 $12,370 $(8,903)

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