Foundations Of Finance
10th Edition
ISBN: 9780134897264
Author: KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher: Pearson,
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Chapter 10, Problem 15SP
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Should the project be accepted?
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If the cash flows for Project M are C0 = -1,000; C1 = +800; C2 = +700 and C3= -200. Calculate the IRR for the project. For what range of discount rates does the project have a positive NPV?
Calculate the payback period, net present value, and internal rate of return for Project A. Assume a discount rate of 10%. Should the firm accept or reject Project A? Explain. If Project A and Project B are mutually exclusive, which is the better choice? Explain. What are “non-conventional” cash flows? What issues arise when evaluating projects with “non-conventional” cash flows?
Project A
Project B
Year
Cash Flow
Year
Cash Flow
0
-$100,000
0
-$1
1
$70,000
1
$0
2
$0
2
$0
3
$50,000
3
$10
All parts are under one question therefore per your policy all can be answered.
7. The NPV and payback period
What information does the payback period provide?
Suppose you are evaluating a project with the expected future cash inflows shown in the following table. Your boss has asked you to calculate the project’s net present value (NPV). You don’t know the project’s initial cost, but you do know the project’s regular, or conventional, payback period is 2.50 years.
Year
Cash Flow
Year 1
$375,000
Year 2
$425,000
Year 3
$500,000
Year 4
$400,000
A. If the project’s weighted average cost of capital (WACC) is 9%, the project’s NPV (rounded to the nearest dollar) is:
$353,334
$305,152
$273,031
$321,213
B. Which of the following statements indicate a disadvantage of using the regular payback period (not the discounted payback period) for capital budgeting decisions? Check all that apply.
The payback period does not…
Chapter 10 Solutions
Foundations Of Finance
Ch. 10 - Why is capital budgeting such an important...Ch. 10 - What are the disadvantages of using the payback...Ch. 10 - Prob. 4RQCh. 10 - What are mutually exclusive projects? Why might...Ch. 10 - Prob. 6RQCh. 10 - When might two mutually exclusive projects having...Ch. 10 - Prob. 1SPCh. 10 - Prob. 2SPCh. 10 - Prob. 3SPCh. 10 - Prob. 4SP
Ch. 10 - (NPV, PI, and IRR calculations) Fijisawa Inc. is...Ch. 10 - (Payback period, NPV, PI, and IRR calculations)...Ch. 10 - (NPV, PI, and IRR calculations) You are...Ch. 10 - (Payback period calculations) You are considering...Ch. 10 - (NPV with varying required rates of return)...Ch. 10 - Prob. 10SPCh. 10 - (NPV with varying required rates of return) Big...Ch. 10 - (NPV with different required rates of return)...Ch. 10 - (IRR with uneven cash flows) The Tiffin Barker...Ch. 10 - (NPV calculation) Calculate the NPV given the...Ch. 10 - (NPV calculation) Calculate the NPV given the...Ch. 10 - (MIRR calculation) Calculate the MIRR given the...Ch. 10 - (PI calculation) Calculate the PI given the...Ch. 10 - (Discounted payback period) Gios Restaurants is...Ch. 10 - (Discounted payback period) You are considering a...Ch. 10 - (Discounted payback period) Assuming an...Ch. 10 - (IRR) Jella Cosmetics is considering a project...Ch. 10 - (IRR) Your investment advisor has offered you an...Ch. 10 - (IRR, payback, and calculating a missing cash...Ch. 10 - (Discounted payback period) Sheinhardt Wig Company...Ch. 10 - (IRR of uneven cash-flow stream) Microwave Oven...Ch. 10 - (MIRR) Dunder Mifflin Paper Company is considering...Ch. 10 - (MIRR calculation) Arties Wrestling Stuff is...Ch. 10 - (Capital rationing) The Cowboy Hat Company of...Ch. 10 - Prob. 29SPCh. 10 - (Size-disparity problem) The D. Dorner Farms...Ch. 10 - (Replacement chains) Destination Hotels currently...Ch. 10 - Prob. 32SPCh. 10 - Prob. 33SPCh. 10 - Why is the capital-budgeting process so important?Ch. 10 - Prob. 2MCCh. 10 - What is the payback period on each project? If...Ch. 10 - What are the criticisms of the payback period?Ch. 10 - Prob. 5MCCh. 10 - Prob. 6MCCh. 10 - Prob. 7MCCh. 10 - Prob. 8MCCh. 10 - Prob. 9MCCh. 10 - Determine the IRR for each project. Should either...Ch. 10 - How does a change in the required rate of return...Ch. 10 - Caledonia is considering two investments with...
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- Calculate the cash flows for each year. Based on these cash flows and the average project cost of capital, what are the projects NPV, IRR, MIRR, PI, payback, and discounted payback? Do these indicators suggest that the project should be undertaken?arrow_forwardCalculate the project cash flows for each year. Based on these cash flows and the average project cost of capital, what are the projects NPV, IRR, MIRR, PI, payback, and discounted payback? Do these indicators suggest that the project should be undertaken?arrow_forwardSuppose you have to choose between two mutually exclusive investment projects with the following cash flows (all numbers are in $1,000s): [image attached] Both projects have a discount rate of 9%. Determine the Payback Period, Net Present Value (NPV) and the IRR for each project. Which is the better project based on NPV? And how can you use the IRR criterion to obtain the correct (i.e., value maximizing) project choice? t=0 t = 1 t = 2 Project A -$400 $250 $300 Project B -$200 $140 $179 Skip Extension Tip: Double click to open in new tabarrow_forward
- please solve using excel formulaarrow_forwardPlease answer all questions a,b and c with explanations. Should each discount be accepted or rejected. Thxarrow_forward7. The NPV and payback period What information does the payback period provide? Suppose you are evaluating a project with the expected future cash inflows shown in the following table. Your boss has asked you to calculate the project's net present value (NPV). You don't know the project's initial cost, but you do know the project's regular, or conventional, payback period is 2.50 years. Year Year 1 Year 2 Year 3 Year 4 If the project's weighted average cost of capital (WACC) is 10%, the project's NPV (rounded to the nearest dollar) is: O O Cash Flow $325,000 $475,000 $425,000 $475,000 0 0 $351,183 $367,146 Which of the following statements indicate a disadvantage of using the regular payback period (not the discounted payback period) for capital budgeting decisions? Check all that apply. $319,257 $303,294 The payback period is calculated using net income instead of cash flows. The payback period does not take the project's entire life into account. The payback period does not take the…arrow_forward
- 2.When comparing two projects with different lives, why do you compute an annuity with an equivalent present value (PV) to the net present value (NPV)? A. so that you can see which project has the greatest net present value (NPV) B. to reduce the danger that changes in the estimate of the discount rate will lead to choosing the project with a shorter timeframe C. to ensure that cash flows from the project with a longer life that occur after the project with the shorter life has ended are considered D. so that the projects can be compared on their cost or value created per yeararrow_forward1. Which of the following is not true? Group of answer choices The method in which we calculate a project’s Internal Rate of Return (IRR) is called the Discounted Cash Flow approach. The Payback period can be calculated using the discounted (present) values of future cash inflows. The Payback period calculated using this method is what's called the Discounted Payback Period. The Net Present Value is calculated using the present value of the investments and future cash inflows. None of the above (all of the above are correct)arrow_forward6.Calculate the project's Modified Internal Rate of Return (MIRR). What critical assumption does the MIRR make that differentiates it from the IRR? TIP : look for the definition of Modified Internal Rate of Return, and then do it in excel, easy !!! Year Net Cash flow Future Value of Net Cash flow 0 -$20.8 example 1 $4.5 $7.97 (n=6, i=10%)=fv(.1,6,,4.5) 2 $6.3 (n=5, i=10%) 3 $5.2 (n=4, i=10%) 4 $3.9 (n=3, i=10%) 5 $2.1 (n=2, i=10%) 6 $1.3 (n=1, i=10%) 7 $0.5 (n=0, i=10%) Sum = $XX.XX MIRR = ( in excel ) Rate ( 7,-20.8, xx.xx) 7.Where does the value of MIRR fall relative to the discount rate and IRR?arrow_forward
- Which one of the following statements is correct? If the initial cost of a project is increased, the net present value of that project will also increase. The net present value is positive when the required return exceeds the internal rate of return. If the internal rate of return equals the required return, the net present value will equal zero. Net present value is equal to an investment's cash inflows discounted to today's dollars.arrow_forwardPlease see attached:arrow_forwardYou are analyzing a project and have prepared the following data: a. Based on the net present value of this project, should you reject or accept this project? (Please provide the formulas for calculation or the keys applied if a financial calculator is used) b. What is the internal rate of return (IRR) of this project? Should you reject or accept this project? (Please use a financial calculator and list the keys you use)arrow_forward
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