Note: Question 12, 13, 14 and 15 are based on the sametwo projects A and B.Your firm has estimated the following cash flows for twomutually exclusive capital investment projects. Firm uses4.9 years as the cutoff for the discounted payback period.The firm's required rate of return is 11%.If the firm has enough capital for both projects, what isyour recommendation?Project A Cash FlowYearProject B Cash Flow-$80,000-$180,0001$23,000$53,000$23,000$53,000$23,000$47,0004$20,000$47,000$20,000$40,0006$20,000$27,000Both projects A and B should be rejected.Both project A and B should be acceptedDue to time disparity, project A should be accepted.Project A should be acceptedProject B should be accepted

Payback period is the number of years an investment will take recoup the initial investment.

Your firm has estimated the following cash flows for two mutually exclusive capital investment projects. Firm uses 4.9 years as the cutoff for the discounted payback period. The firm's required rate of return is 11%. If the firm has enough capital for both projects, what is your recommendation?

Your firm has estimated the following cash flows for two mutually exclusive capital investment projects. Firm uses 4.9 years as the cutoff for the discounted payback period. The firm's required rate of return is 11%. If the firm has enough capital for both projects, what is your recommendation?

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 deciding between two mutually exclusive investment opportunities. Both require the same initial investment of $9.6 million. Investment A will generate $1.86 million per year (starting at the end of the first year) in perpetuity. Investment B will generate $1.55 million at the end of the first year, and its revenues will grow at 2.2% per year for every year after that. Which investment has the higher IRR? (Round to the nearestinteger.) Which investment has the higher NPV when the cost of capital is 7.8%? In this case, for what values of the cost of capital does picking the higher IRR give the correct answer as to which investment is the best opportunity?
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 9 percent, and that the maximum allowable payback and discounted payback statistics for the project are 2.0 and 3.0 years, respectively. Time: 0 1 2 3 4 5 6 Cash flow: -$7,300 $1,160 $2,360 $1,560 $1,560 $1,360 $1,160 Use the Pl decision rule to evaluate this project. (Do not round intermediate calculations and round your final answer to 2 decimal places.) PI 0.94 Should it be accepted or rejected? O rejected O accepted
Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown below. The required rate of return on projects of both of their risk class is 8 percent, and that the maximum allowable payback and discounted payback statistic for the projects are 2 and 3 years, respectively. Time Project A Cash Flow Project B Cash Flow Use the payback decision rule to evaluate these projects, which one(s) should it be accepted or rejected? Multiple Choice 0 -35,000 -45,000 1 25,000 25,000 2 45,000 5,000 3 16,000 65,000
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 11 percent, and that the maximum allowable payback and discounted payback statistics for your company are 3.0 and 3.5 years, respectively. Time: Cash flow: 0 1 2 -$241,000 $66,400 $84,600 Payback Use the payback decision rule to evaluate this project. Note: Round your answer to 2 decimal places. years 4 3 $141,600 $122,600 Should the project be accepted or rejected? (Click to select) 5 $81,800
Consider a project with free cash flows in one year of $90,000 in a weak economy or $117,000 in a strong economy, with each outcome being equally likely. The initial investment required for the project is $80,000, and the project's cost of capital is 15%. The risk-free interest rate is 5%. c. Suppose that to raise the funds for the initial investment the firm borrows $45,000 at the risk-free rate and issues new equity to cover the remainder. In this situation, calculate the value of the firm's levered equity from the project. What is the cost of capital for the firm's levered equity? d. What is the basic goal of financial management with respect to capital structure? Is there an easily identifiable capital structure that will maximize the value of the firm? Why or why not?
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively. Time: 0 1 2 3 4 5 6 Cash flow: -$4,900 $1,260 $2,460 $1,660 $1,660 $ 1,460 $1,260 Use the NPV decision rule to evaluate this project. (Do not round intermediate calculations and round your final answer to 2 decimal places.) Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 12 percent, and that the maximum allowable payback and discounted payback statistics for your company are 2.5 and 3.0 years, respectively. Time: 0 1 2 3 4 5 Cash flow -$228,000 $65, 100 $83,300 $140, 300 $121,300 $80, 500 Use the discounted payback decision rule to evaluate this project. (Do not round intermediate…
An analyst has the following projected free cash flows for an investment: Year 1: $125,050; Year 2: $137,650; Year 3 to15: $150,000 a year; Year 16 to 20: $200,000 a year. The investment is expected to have a terminal value of $500,000 at the end of Year 20. If the analyst has estimated a present value of $3 millions for the investment, what is the discount rate that she/he has used in calculations. A. % 1.37 B. % 1.78 C. % 2.12 D. % 3.25
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 11 percent, and that the maximum allowable payback and discounted payback statistics for your company are 3 and 3.5 years, respectively. Time: Cash flow: 0 1 -$233,000 $65,600 MIRR 2 $83,800 % 4 $140,800 $121,800 Use the MIRR decision rule to evaluate this project. Note: Do not round intermediate calculations and round your final answer to 2 decimal places. 5 $81,000
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Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown below. The required rate of return on projects of both of their risk class is 8 percent, and that the maximum allowable payback and discounted payback statistic for the projects are 2 and 3 years, respectively. Time 1 2 3 Project A Cash Flow Project B Cash Flow -25,000 15,000 35,000 6,000 -35,000 15,000 25,000 55,000 Use the NPV decision rule to evaluate these projects; which one(s) should be accepted or rejected? Multiple Choice Accept A, reject B Accept neither A nor B Accept both A and B Reject A, accept B
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively. Time: Cash flow: 0 4 -$5,000 $1,200 $2,400 $1,600 $1,600 $1,400 Use the IRR decision rule to evaluate this project. (Do not round intermediate calculations and round your final onswer to 2 decimal places.) Answer is complete but not entirely correct. IRR 6 $1,200 14.00 %
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 7 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively. Time: 1 2 3 4 Cash flow: -$5,000 $1,270 $2,470 $1,670 $1,670 5 6 $1,470 $1,270 Use the Pl decision rule to evaluate this project. (Do not round intermediate calculations and round your final answer to 2 decimal places.) PI Should it be accepted or rejected? O rejected O accepted

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