Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
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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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 cash inflows and outflows shown in the following table.

Year Cash flow
0 $ 200,000
1 –920,000
2 1,582,000
3 –1,205,200
4 343,200
  1. a. Why is it difficult to calculate the payback period for this project?
  2. b. Calculate the investment’s net present value at each of the following discount rates: 0%, 5%, 10%, 15%, 20%, 25%, 30%, 35%.
  3. c. What does your answer to part b tell you about this project’s IRR?
  4. d. Should Froogle invest in this project if its cost of capital is 5%? What if the cost of capital is 15%?
  5. 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?
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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…
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.
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Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)

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