Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
15th Edition
ISBN: 9780134476315
Author: Chad J. Zutter, Scott B. Smart
Publisher: PEARSON
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Textbook Question
Chapter 10, Problem 10.26P
Integrative: Multiple IRRs Froogle Enterprises is evaluating an unusual investment project. What makes the project unusual is the stream of
| Year | Cash flow |
| 0 | $ 200,000 |
| 1 | –920,000 |
| 2 | 1,582,000 |
| 3 | –1,205,200 |
| 4 | 343,200 |
- a. Why is it difficult to calculate the payback period for this project?
- b. Calculate the investment’s
net present value at each of the following discount rates: 0%, 5%, 10%, 15%, 20%, 25%, 30%, 35%. - c. What does your answer to part b tell you about this project’s
IRR ? - d. Should Froogle invest in this project if its cost of capital is 5%? What if the cost of capital is 15%?
- e. In general, when faced with a project like this one, how should a firm decide whether to invest in the project or reject it?
Expert Solution & Answer
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Students have asked these similar questions
Question 1.
A project manager is working on justification of a project. Since very little
information is known about the project, some rough estimates have been gathered. Following table is
prepared to show the cash inflow and outflow for the following years:
Cash In Flow ($)
Cash Out Flow ($)
Year
900
300
200
2.
400
200
500
300
4
500
200
900
300
a)
What is the payback period for this project?
b)
lf the required rate of return is 20%, is the project mentioned above acceptable? Use NPV.
c).
Calculate profitability index to determine if the project acceptable. Use 20% interest rate.
) If the required rate of return is accepted as 15%, how this affects the NPV of the project.
There is no need for calculation, only make comment.
d)
NOTE: Show the calculations for the question a, b, and c and fill in the table below.
Cash
Net
Cash In
Discounted
Year
Out
cash
Cum Cash Flow
Flow ($)
Cash Flow
Flow ($)
flow
900
300
200
400
200
3
500
300
500
200
900
300
Discounted Cash Flow (NPV)
Net Cash In…
Table 8-5 Cumulative (Single Tail) Probabilities of the Normal Probability Distribution (Areas
under the Normal Curve from – o to Z)
Example: the area to the left of Z = 1.34 is found by following the left Z column
down to 1.3 and moving right to the .04 column. At the intersection read 9099. The
area to the right of Z- 1.34 is - 9099 - 0901. The area between the mean (center
ZX line) and Z- 1.34 is 9099-5- 4099.
01
.02
.03
.04
.Os
.06
07
.08
.09
S000
5040
SO80
5120
5160
5199
5239
5279
5319
5359
5398
5438
5478
5517
5557
5596
5636
5675
5714
5753
.2
5793
5832
5871
5910
5948
5987
6026
.6064
6103
6141
.6179
6217
.6255
6293
6331
6368
6406
6443
6480
6517
6554
6591
.6628
6664
6700
6736
6772
.6808
6844
6879
6915
6950
6985
7019
.7054
7088
7123
.7157
.7190
.7224
.7257
7291
.7324
7357
.7389
.7422
7454
.7486
.7517
7549
.7
.7580
7611
7642
7673
.7704
7734
7764
.7794
7823
7852
.7881
7910
.7939
7967
.7995
8023
S051
8078
8106
S133
8159
8186
8212
8238
8264
8289
8315
8340
8365
8389
10
8413
8438
8461
8485…
Example 10.11: Multiple Internal Rates of Return
Strip Mine, Inc., is considering a project with cash flows described in the following table
Cash Flows (in $millions) at Date
2
-10
41
-30
-1
Compute the IRR of this project.
Chapter 10 Solutions
Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
Ch. 10.1 - What is the financial managers goal in selecting...Ch. 10.2 - What is the payback period? How is it calculated?Ch. 10.2 - What weaknesses are commonly associated with the...Ch. 10.3 - How is the net present value (NPV) calculated for...Ch. 10.3 - Prob. 10.5RQCh. 10.3 - Prob. 10.6RQCh. 10.4 - Prob. 10.8RQCh. 10.4 - Prob. 10.9RQCh. 10.4 - Prob. 10.10RQCh. 10.5 - How is a net present value profile used to compare...
Ch. 10.5 - Prob. 10.13RQCh. 10 - Prob. 1ORCh. 10 - All techniques with NPV profile: Mutually...Ch. 10 - Elysian Fields Inc. uses a maximum payback period...Ch. 10 - Prob. E10.1WUECh. 10 - Prob. 10.2WUECh. 10 - Prob. E10.2WUECh. 10 - Axis Corp. is considering investment in the best...Ch. 10 - Prob. E10.3WUECh. 10 - Prob. 10.4WUECh. 10 - Prob. E10.4WUECh. 10 - Cooper Electronics uses NPV profiles to visually...Ch. 10 - Prob. E10.5WUECh. 10 - Payback period The Ball Shoe Company is...Ch. 10 - Payback comparisons Nova Products has a 5-year...Ch. 10 - Prob. 10.3PCh. 10 - Long-term investment decision, payback method Bill...Ch. 10 - Prob. 10.5PCh. 10 - Prob. 10.6PCh. 10 - Prob. 10.7PCh. 10 - Prob. 10.8PCh. 10 - Prob. 10.9PCh. 10 - Prob. 10.10PCh. 10 - Prob. 10.11PCh. 10 - Prob. 10.12PCh. 10 - NPV and EVA A project costs 2,500,000 up front and...Ch. 10 - Prob. 10.14PCh. 10 - Prob. 10.15PCh. 10 - Prob. 10.16PCh. 10 - Prob. 10.17PCh. 10 - Prob. 10.18PCh. 10 - Prob. 10.19PCh. 10 - Prob. 10.20PCh. 10 - Prob. 10.21PCh. 10 - Prob. 10.22PCh. 10 - Prob. 10.23PCh. 10 - Prob. 10.24PCh. 10 - All techniques with NPV profile: Mutually...Ch. 10 - Integrative: Multiple IRRs Froogle Enterprises is...Ch. 10 - Integrative: Conflicting Rankings The High-Flying...Ch. 10 - Problems with IRR White Rock Services Inc. has an...Ch. 10 - ETHICS PROBLEM Diane Dennison is a financial...Ch. 10 - Spreadsheet Exercise The Drillago Company is...
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