Pearson Etext For Foundations Of Finance -- Combo Access Card (10th Edition)
10th Edition
ISBN: 9780135639344
Author: Arthur J. Keown, John D Martin, J. William Petty
Publisher: PEARSON
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Chapter 10, Problem 15SP
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Should the project be accepted?
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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…
Suppose 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
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Chapter 10 Solutions
Pearson Etext For Foundations Of Finance -- Combo Access Card (10th Edition)
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_forwardPlease answer all questions a,b and c with explanations. Should each discount be accepted or rejected. Thxarrow_forward
- Please see attached:arrow_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_forwarda. What are the project’s annual net cash inflows? b. What is the present value of the project’s annual net cash inflows? (Round your final answer to the nearest whole dollar amount.) c. What is the project’s net present value? (Round final answer to the nearest whole dollar amount.) d. What is the profitability index for this project? (Round your answer to 2 decimal places.) e. What is the project’s internal rate of return? (Round your answer to nearest whole percent.)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_forwardWhich 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_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
- Which of the following comes closest to the net present value (NPV) of a project whose initial investment is $5 and which produces two cash flows: the first at the end of year 2 of $3 and the second at the end of year 4 of $7? The required rate of return is 13%? Select one: a. $1.84 b. $0 c. $1.64 d. $2.05 e. $2.26arrow_forwardConsider two mutually exclusive projects with the following expected cash flows and a required rate of return of 12% Cash Flows Year Project A Project B 0 -75,000 -100,000 1 60,000 60,000 2 30,000 50,000 3 30,000 60,000 (a) If you apply the discounted payback criterion, which investment will you choose? Why? (b) If you apply the NPV criterion, which investment will you choose? Why? (c) Based on your answers in (a) and (b), which project will you finally choose? Why ? (i.e clearly explain the strengths and the weaknesses of each method therefore the reason(s) for choosing the project based on the chosen method)arrow_forwardplease give Step by Step Solution otherwise i give you DISLIKE !arrow_forward
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