Foundations of Finance (9th Edition) (Pearson Series in Finance)
9th Edition
ISBN: 9780134083285
Author: Arthur J. Keown, John D. Martin, J. William Petty
Publisher: PEARSON
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Chapter 10, Problem 3MC
What is the payback period on each project? If Caledonia imposes a 3-year maximum acceptable payback period, which of these projects should be accepted?
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Calculate for each project:
The payback period for each project
The Net Present Value (NPV)
The Profitability index
Which project should be accepted and why?
PLEASE SEE ATTACHED PHOTO TO ANSWER THE ABOVE QUESTIONS
Under what conditions might you find more thanone IRR for a project? How would you decidewhether or not to accept the project? If you werecomparing two mutually exclusive projects, onewith a single IRR of 12% and the other with two different IRRs of 10% and 15%, how should youchoose between the projects?
Suppose a firm is considering two mutually exclusive projects. One project has a life of6 years; the other, a life of 10 years. Both projects can be repeated at the end of their lives.Might the failure to employ a replacement chain or EAA analysis bias the decision towardone of the projects? If so, which one and why?
Chapter 10 Solutions
Foundations of Finance (9th Edition) (Pearson Series in 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 - (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. 9SPCh. 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. 28SPCh. 10 - (Size-disparity problem) The D. Dorner Farms...Ch. 10 - (Replacement chains) Destination Hotels currently...Ch. 10 - Prob. 33SPCh. 10 - Prob. 34SPCh. 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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- The Payback period as per calculation is 6 Years . Pre determined payback period is 5.5 Years What is your recommendation as per the Payback Period Technique. More Information is needed to take the decision Reject the Project Accept the Project Project can be Accepted or Rejectedarrow_forwardWhat is the payback period on each of the above projects? Given that you wish to use the payback rule with a cutoff period of two years, which projects would you accept? Why? If you use a cutoff period of three years, which projects would you accept? Why? If the opportunity cost of capital is 10%, which projects have positive NPVs? How do you know? “If a firm uses a single cutoff period for all projects, it is likely to accept too many short-lived projects.” Is this statement true or false? How do you know? If the firm uses the discounted-payback rule, will it accept any negative NPV projects? Will it turn down any positive NPV projects? How do you know?arrow_forwardWhich project(s) should be purchased if they are independent? Which project(s) should be purchased if they are mutually exclusive?arrow_forward
- Zandri Industries is evaluating whether to invest in solar panels to provide some of the electrical needs of its main office building in Buffalo, New York. The solar panel project would cost $475,000 and would provide cost savings in its utility bills of $45,000 per year. It is anticipated that the solar panels would have a life of 15 years and would have no residual value. (Click the icon to view the present value factor table.) (Click the icon to view the present value annuity factor table.). (Click the icon to view the future value factor table.) (Click the icon to view the future value annuity factor Read the requirements. table.) Requirement 1. Calculate the payback period in years of the solar panel project. Determine the formula, then calcuste the payback period. (Round your answer to two decimal places.) Initial investment Expected annual net cash inflow Payback period %3D %24 475,000 $4 45,000 10.56 years Requirement 2. If the company uses a discount rate of 10%, what is the…arrow_forwardWhen 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 the projects can be compared on their cost or value created per year B. to reduce the danger that changes in the estimate of the discount rate will lead to choosing the project with a shorter time frame C. so that you can see which project has the greatest net present value (NPV) D. to avoid complications arising from alternating cash inflows and outflows O E. to ensure that cash flows from the project with a longer life that occur after the project with the shorter life has ended are consideredarrow_forwardUsing the payback period method, you will accept a project if: its payback period is the same as the specified payback requirement. it generates the same cash flow every year. its payback period is longer than the specified payback requirement. its payback period is shorter than the specified payback requirement. it never pays back over its life.arrow_forward
- Which of the following describes the NPV decision rule? Accept if the cost of the project is recouped within 3 years. Accept if the PV of the cash inflows of the project divided by the absolute value of the cost of the project is greater than one. Accept if the PV of the cash inflows from the project minus the cost of the project is greater than zero Accept if the average net income from the project divided by the average book value is greater than the target required Accept if the rate of return earned on the project is greater than the required return for the project.arrow_forwardYou are considering the following two mutually exclusive projects. The crossover rate between these two projects is crossover rate. Year Project A Project B 0 1 23 $28,000 10,500 10,500 18,500 $28,000 18,610 8,500 10,630 percent and Project_ should be accepted if the required return is greater than thearrow_forwardIn an unrelated analysis, you have the opportunity to choose between the following two mutually exclusive projects, Project T (which lasts for 2 years) and Project F (which lasts for 4 years): The projects provide a necessary service, so whichever one is selected is expected to be repeated into the foreseeable future. Both projects have a 10% cost of capital. (1) What is each projects initial NPV without replication? (2) What is each projects equivalent annual annuity? (3) Apply the replacement chain approach to determine the projects extended NPVs. Which project should be chosen? (4) Assume that the cost to replicate Project T in 2 years will increase to 105,000 due to inflation. How should the analysis be handled now, and which project should be chosen?arrow_forward
- You are considering the following two mutually exclusive projects. The crossover rate between these two projects is ___ percent and Project ___ should be accepted if the required return is greater than the crossover rate. Year : Project A : Project B 0 : −$ 29,000 : −$ 29,000 1 : 11,000 : 19,120 2 : 11,000 : 9,000 3 : 19,000 : 11,140arrow_forwardAnswer the following: 1 What is the payback period on each of the above projects? 2 Given that you wish to use the payback rule with a cutoff period of two years, which projects would you accept? Why? 3 If you use a cutoff period of three years, which projects would you accept? Why?arrow_forwardThe following information is available on two mutually exclusive projects. All numbers are in ‘000s. Project Year 0 Year 1 Year 2 Year 3 Year 4 A $700 $300 $300 $400 $400 B $700 $600 $300 $200 $100 a: If the minimum acceptable rate of return is 10%, which project should be selected using the Net Present Value (NPV) method? Which project should be selected if the Internal Rate of Return (IRR) method is used? b: At what cross‐over rate would the firm be indifferent between the two projects? What is the NPV for both projects at the crossover rate? c: How much should cash flow in year 3 for project B increase or decrease in order for NPV(B) to be equal to NPV(A)?arrow_forward
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