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
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Compute the
See the table attached.
Transcribed Image Text:This table presents a comparison of cash flows over a period of six years for two different projects, Project A and Project B. Each row represents a different year, with Year 0 marking the initial investment and the subsequent years showing the cash flows generated.
| Year | Project A Cash Flow | Project B Cash Flow |
| ---- | ------------------- | ------------------- |
| 0 | -2500 | -2500 |
| 1 | 900 | 50 |
| 2 | 800 | 600 |
| 3 | 1600 | 150 |
| 4 | 100 | 900 |
| 5 | 50 | 500 |
| 6 | 300 | 2500 |
- **Year 0:** Both projects require an initial investment of -2500.
- **Year 1 to Year 6:** The table displays the cash inflows for Projects A and B, highlighting differences in the pattern and magnitude of cash returns over time.
This data can be used for financial analysis, such as calculating the net present value or internal rate of return for each project, helping in the decision-making process regarding project selection.
Expert Solution
Step 1
NPV: NPV is the difference of present value of cash inflows and cash outflow.
IRR: IRR is the discount rate at which the PV of cash inflows equals to cash outflow.
Payback period: The period at which the initial investment is recovered in payback period.
Profitability index: This represents the index number of what net wealth is created in the project for per unit of investment.
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