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 4SP
a)
Summary Introduction
To determine: The
b)
Summary Introduction
To determine: The internal
c)
Summary Introduction
To determine: The internal rate of return.
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(IRR
calculation) Determine the IRR on the following projects:
a. An initial outlay of $8,000 resulting in a free cash flow of $1,901 at the end of each year for the next 10 years
b. An initial outlay of $8,000 resulting in a free cash flow of $2,152 at the end of each year for the next 20 years
c. An initial outlay of $8,000 resulting in a free cash flow of $1,045 at the end of each year for the next 12 years
d. An initial outlay of $8,000 resulting in a free cash flow of $2,894 at the end of each year for the next 5 years
a. What is the IRR of a project with an initial outlay of $8,000 resulting in a free cash flow of $1,901 at the end of each
year for the next 10 years?
% (Round to two decimal places.)
Project A has a required return of 9.2 percent and cash flows of -$87,000, $32,600, $35,900, and $43,400 for Years 0 to 3, respectively. Project B has a required return of 12.7 percent and cash flows of -$85,000, $14,700, $21,200, and $89,800 for Years 0 to 3, respectively. Which project(s) should you accept based on net present value if the projects are mutually exclusive?
Select one:
A. Accept either one, but not both
B. Accept both projects
C. Accept Project A and reject Project B
D. Reject Project A and accept Project B
E. Reject both projects
Consider the cash flows for the following investment projects:
(a) For Project A. find the value of X that makes the equivalent annual receiptsequal the equivalent annual disbursement at i = 13%.(b) Would you accept Project Bat i = 15% based on the AE criterion?
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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- Internal rate of return A project is estimated to cost 463,565 and provide annual net cash flows of 115,000 for nine years. Determine the internal rate of return for this project, using the present value of an annuity table appearing in Exhibit 5 of this chapter.arrow_forwardAverage rate of return Determine the average rate of return for a project that is estimated to yield total income of 936,000 over eight years, has a cost of 1,200,000, and has a 100,000 residual value.arrow_forwardFoster Manufacturing is analyzing a capital investment project that is forecast to produce the following cash flows and net income: The payback period of this project will be: a. 2.5 years. b. 2.6 years. c. 3.0 years. d. 3.3 years.arrow_forward
- Project Y cost $8,000 and will generate net cash inflows of $1,500 in year one, $2,000 in year two, $2,500 in year three, $3,000 in year four and $2,000 in year five. What is the NPV using 8% as the discount rate?arrow_forwardThere are two projects under consideration by the Rainbow factory. Each of the projects will require an initial investment of $35,000 and is expected to generate the following cash flows: Use the information from the previous exercise to calculate the internal rate of return on both projects and make a recommendation on which one to accept. For further instructions on internal rate of return in Excel, see Appendix C.arrow_forwardConsider the cash flows for the following investment projects: (a) For Project A. find the value of X that makes the equivalent annual receiptsequal the equivalent annual disbursement at i = 13%.(b) Would you accept Project Bat i = 15% based on the AE criterion?arrow_forward
- Consider the following sets of investment projects: Compute the equivalent annual worth of each project at i = 13%, and determine the acceptability of each project.arrow_forwardConsider the following project balances for a typical investment project with aservice life of four years: (a) Construct the original cash flows of the project.(b) Determine the interest rate used in computing the project balance.(c) Would this project be acceptable at a MARR of 12%?arrow_forwardAssume that Project A has the cash flows listed below and a relevant cost of capital of 13 percent. Based on this data, determine the net present value (NPV) of this project using the equivalent annual annuity (EAA) approach and assuming infinite replication. Year 0 1 2 3 4 5 $2.905.70 O $4.967.16 $2.063.33 $3.865.27 $6,244.42 Project A Cash Flow - $8.000.00 $ $ $ 0.00 0.00 0.00 0.00 $20,000.00arrow_forward
- Consider the following project-balance profiles for proposed investment projects, where the project-balance figures are rounded to the nearest dollar: (a) Compute the net present worth of each investment.(b) Determine the project balance at the end of period 2 for Project C ifA2 = $500.(c) Determine the cash flows for each project.(d) Identify the net future worth of each project.arrow_forwardA project has cash flows of –$148,000, $43,000, $87,000, and $44,000 for Years 0 to 3, respectively. The required rate of return is 11 percent. Based on the internal rate of return of what percent for this project, you should accept or reject the project. Enter your answer in the first blank as a percent rounded to 2 decimal places, e.g., 32.16. Also enter either "accept" or "reject" in the second blank.arrow_forwardGiven the following attributes of an investment project with a five-year life: investment outlay, year0, $5,000; after-tax cash inflows, year 1, $800; year 2, $900; year 3, $1,500; year 4, $1,800; and year5, $3,200. (a) Use the built-in NPV function of Excel to estimate the NPV of this project. Roundyour answer to the nearest whole dollar. Assume an after-tax discount rate of 12.0%. (b) Estimatethe payback period, in years, for this project under the assumption that cash inflows occur evenlythroughout the year. Round your answer to one 1 decimal place.arrow_forward
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