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 6SP
(
Calculate the NPV, PI, and IRR for each project and indicate if the project should be accepted.
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( NPV and Pl calculations ) You are considering two independent projects in Birmingham and
Manchester, respectively. The initial cash outlay associated with the Birmingham project is
$550,000, and the initial cash outlay associated with the Manchester project is $750,000. The
required rate of return on both projects is 13 percent. The expected annual free cash inflows from
each project are as follows:
Calculate the NPV and PI for each project and indicate if the project should be accepted.
MANCHESTER
BIRMINGHAM
-$550,000
-$750,000
Initial outlay
Inflow year 1
Inflow year 2
170,000
170,000
170,000
120,000
120,000
Inflow year 3
Inflow year 4
Inflow year 5
Inflow year 6
120,000
120,000
120,000
170,000
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120,000
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(Net present value, profitability index, and internal rate of return calculations). You are considering two independent projects, project A and project B. The initial cash outlay associated with project A is $50,000 and the initial cash outlay associated with project B is $70,000. The required rate of return on both projects is 12 percent. The expected annual free cash flows from each project are as follows:
YEAR
PROJECT A
PROJECT B
0
-$50,000
-$70,000
1
12,000
13,000
2
12,000
13,000
3
12,000
13,000
4
12,000
13,000
5
12,000
13,000
6
12,000
13,000
Calculate the NPV, PI, and IRR for each project and indicate if the project should be accepted.
There are two projects under consideration by the Rainbow
factory. Each of the projects will require an initial
investment of $35,192 and is expected to generate the
following cash flows:
First Year
Second Year Third Year
Total
Alpha Project
$32,000
$22,000
$5,000
$59,000
Beta Project
7,000
23,000
29,047
59,047
A. Calculate the internal rate of return on both projects.
Use the IRR spreadsheet function to calculate internal rate
of return.
Alpha Project
%
Beta Project
%
B. Make a recommendation on which one to accept.
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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- There are two projects under consideration by the Rainbow factory. Each of the projects will require an initial investment or $28.000 and is expected to generate the following cash flows: If the discount rate is 5% compute the NPV of each project and make a recommendation of the project to be chosen.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_forwardProject S has a cost of $10,000 and is expected to produce benefits (cash flows) of $3,000 per year for 5 years. Project L costs $25,000 and is expected to produce cash flows of $7,400 per year for 5 years. Calculate the two projects’ NPVs, IRRs, MIRRs, and PIs, assuming a cost of capital of 12%. Which project would be selected, assuming they are mutually exclusive, using each ranking method? Which should actually be selected?arrow_forward
- Buena Vision Clinic is considering an investment that requires an outlay of 600,000 and promises a net cash inflow one year from now of 810,000. Assume the cost of capital is 10 percent. Required: 1. Break the 810,000 future cash inflow into three components: a. The return of the original investment b. The cost of capital c. The profit earned on the investment 2. Now, compute the present value of the profit earned on the investment. 3. Compute the NPV of the investment. Compare this with the present value of the profit computed in Requirement 2. What does this tell you about the meaning of NPV?arrow_forwardConsider the following two mutually exclusive projects (W and Z). -The table- Whichever project you choose, if any, you require a 12 percent return on your investment.(a) Calculate the payback period for each project.(b) Calculate the net present value (NPV) of each project(c) Based on your answers in (a) and (b), which project will you finally choose? Explain.arrow_forwardThere are two projects under consideration by the Rainbow factory. Each of the projects will require an initial investment of $34,665 and is expected to generate the following cash flows: First Year Second Year Third Year Total Alpha Project $31,500 $22,000 $4,500 $58,000 Beta Project 7,500 23,500 29,066 60,066 A. Calculate the internal rate of return on both projects. Use the IRR spreadsheet function to calculate internal rate of return. Alpha Project fill in the blank % Beta Project fill in the blank %arrow_forward
- There are two projects under consideration by the Rainbow factory. Each of the projects will require an initial investment of $35,017 and is expected to generate the following cash flows: First Year Second Year Third Year Total Alpha Project $32,000 $22,000 $4,500 $58,500 Beta Project 8,000 24,000 27,106 59,106 A. Calculate the internal rate of return on both projects. Use the IRR spreadsheet function to calculate internal rate of return. Alpha Project fill in the blank 1% Beta Project fill in the blank 2% B. Make a recommendation on which one to accept. .arrow_forwardThere are two projects under consideration by the Rainbow factory. Each of the projects will require an initial investment of $34,675 and is expected to generate the following cash flows: First Year Second Year Third Year Total Alpha Project $32,000 $22,000 $4,500 $58,500 Beta Project 7,000 24,000 28,010 59,010 A. Calculate the internal rate of return on both projects. Use the IRR spreadsheet function to calculate internal rate of return. Alpha Project _____% Beta Project _____% B. Make a recommendation on which one to accept. _____arrow_forwardThere are two projects under consideration by the Rainbow factory. Each of the projects will require an initial investment of $35,506 and is expected to generate the following cash flows: First Year Second Year Third Year Total Alpha Project $32,000 $23,000 $5,500 $60,500 Beta Project 7,000 24,000 30,960 61,960 A. Calculate the internal rate of return on both projects. Use the IRR spreadsheet function to calculate internal rate of return. Alpha Project fill in the blank 1% Beta Project fill in the blank 2% B. Make a recommendation on which one to accept. Alpha .arrow_forward
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