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 23SP
(IRR, payback, and calculating a missing cash flow) Mode Publishing is considering building a new printing facility that will involve a large initial outlay and then result in a series of positive
If you know that the project has a regular payback of 2.5 years, what is the project’s
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(Paybackperiod, NPV, PI, and IRR calculations)
You are considering a project with an initial cash outlay of $80,000 and expected free cash flows of $26,000 at the end of each year for 6 years. The required rate of return for this project is 7 percent.
a. What is the project's payback period?
b. What is the project's NPV?
c. What is the project's PI?
d. What is the project's IRR?
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
$350,000
Year 2
$500,000
Year 3
$450,000
Year 4
$425,000
If the project’s weighted average cost of capital (WACC) is 8%, the project’s NPV (rounded to the nearest dollar) is:
$312,620
$295,253
$277,885
$347,356
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 is calculated using net income instead of cash flows.
The payback period does not take the project’s entire life into account.…
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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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- If a copy center is considering the purchase of a new copy machine with an initial investment cost of $150,000 and the center expects an annual net cash flow of $20,000 per year, what is the payback period?arrow_forwardCalculate the net present value of a project which requires an initial investment of OMR 300,000 and it is expected to generate a cash inflow of OMR 60,000 each month for 12 months. Assume that the salvage value of the project is zero. The target rate of return is 12% per annum. Write any formula that you will use first. Is this even or uneven cash flow? What is your opinion about the project? Justify your answer. 2. You as a project manager were asked to develop an Inventory Control Management Information System. Apply the SWOT analysis mind mapping technique.arrow_forwardYou are considering the investment of $111,000 (today) in a lemonade stand. Also, you expect the stand to generate the following future cash flows: • At the end of year 1: $0 • At the end of year 2: $0 • At the end of year 3: $0 • At the end of year 4: $178,000 What is the IRR (Internal Rate of Return) of this project? (Answer to the nearest 0.01%)arrow_forward
- Only correct answer will get Thumb Up. Please fast.arrow_forwardWhat 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. If the project's weighted average cost of capital (WACC) is 9%, the project's NPV (rounded to the nearest dollar) is: $355,048 $287,420 $405,769 $338,141 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 take the time value of money into account. 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.arrow_forwardA new computer system will require an initial outlay of $19, 250, but it will increase the firm's cash flows by $4, 100 a year for each of the next 7 years. Calculate the NPV and decide if the system is worth installing if the required rate of return is 10%.arrow_forward
- A potential project requires an initial investment of $45,000 at the beginning of the 1st year, and will give a net cash inflow of $35,000 per year (realized at the end of the 1st, 2nd and 3rd year respectively) for three years. The required rate of return is 12%. What is the Net Present Value? Make sure you express the formula, so that you can get credit in case you make a numerical errorarrow_forward(Payback period, NPV, PI, and IRR calculations) You are considering a project with an initial cash outlay of $85,000 and expected free cash flows of $20,000 at the end of each year for 7 years. The required rate of return for this project is 9 percent. a. What is the project's payback period? b. What is the project's NPV? c. What is the project's PI? d. What is the project's IRR?arrow_forwardBig Steve's, makers of swizzle sticks, is considering the purchase of a new plastic stamping machine. This investment requires an initial outlay of $90000 and will generate net cash inflows of $21000 per year for 11 years. What is the internal rate of return? Should it be accepted? Why or why not?arrow_forward
- Big Steve's, makers of swizzle sticks, is considering the purchase of a new plastic stamping machine. This investment requires an initial outlay of $110,000 and will generate net cash inflows of $17,000 per year for 8 years. a.What is the project's NPV using a discount rate of 8%? Should the project be accepted? Why or why not? b.What is the project's NPV using a discount rate of 17%? Should the project be accepted? Why or why not?arrow_forwardBig Steve's makers of swizzle sticks, is considering the purchase of a new plastic stamping machine. This investment requires an initial outlay of $110,000 and will generate net cash inflows of $20,000 per year for 9 yrs. What is the project's internal rate of return in %arrow_forward(Calculating IRR, payback, and a missing cash flow) The Merriweather Printing Company is trying to decide on the merits of constructing a new publishing facility. The project is expected to provide a series of positive cash flows for each of the next four years. The estimated cash flows associated with this project are as follows: Project Cash Flow ? Year 0 1 2 3 4 (Click on the icon in order to copy its contents into a spreadsheet.) If you know that the project has a regular payback of 2.4 years, what is the project's IRR? $790,000 360,000 290,000 450,000 The IRR of the project is%. (Round to two decimal places.)arrow_forward
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