Foundations of Financial Management
Foundations of Financial Management
16th Edition
ISBN: 9781259277160
Author: Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen
Publisher: McGraw-Hill Education
bartleby

Concept explainers

bartleby

Videos

Textbook Question
Book Icon
Chapter 12, Problem 23P

Keller Construction is considering two new investments. Project E calls for the purchase of earthmoving equipment. Project H represents an investment in a hydraulic lift. Keller wishes to use a net present value profile in comparing the projects. The investment and cash flow patterns are as follows:

Chapter 12, Problem 23P, Keller Construction is considering two new investments. Project E calls for the purchase of

a. Determine the net present value of the projects based on a zero percent discount rate.

b. Determine the net present value of the projects based on a 9 percent discount rate.

c. The internal rate of return on Project E is 13.25 percent, and the internal rate of return on Project H is 16.30 percent. Graph a net present value profile for the two investments similar to Figure 12-3. (Use a scale up to $ 8,000 on the vertical axis, with $ 2,000 increments. Use a scale up to 20 percent on the horizontal axis, with 5 percent increments.)

d. If the two projects are not mutually exclusive, what would your acceptance or rejection decision be if the cost of capital (discount rate) is 8 percent? (Use the net present value profile for your decision; no actual numbers are necessary.)

e. If the two projects are mutually exclusive (the selection of one precludes the selection of the other), what would be your decision if the cost of capital is (1) 6 percent, (2) 13 percent, (3) 18 percent? Once again, use the net present value profile for your answer.

a.

Expert Solution
Check Mark
Summary Introduction

To calculate: The NPV of the projects by using zero discount rate for Keller Construction Company.

Introduction:

Net present value (NPV):

It is the difference between the PV (present value) of cash inflows and the PV of cash outflows. It is used in capital budgeting and planning of investment to assess the benefits and losses of any project or investment.

Answer to Problem 23P

The NPV of the project E is $8,000 and project H is $5,000 based on zero discount rate for Keller Construction Company.

Explanation of Solution

The calculation of NPV of project E:

NPV=Cash InflowsCash Outflows=$28,000$20,000=$8,000

The calculation of NPV of project H:

NPV=Cash InflowsCash Outflows=$25,000$20,000=$5,000

Working Notes:

The calculation of inflows for project E:

Cash Inflows=Cash Inflow of 1st Year+Cash Inflow of 2nd year+Cash Inflow of 3rdyear+Cash flow of 4thyear=$5,000+$6,000+$7,000+$10,000=$28,000

The calculation of inflows for project H:

Cash Inflows=Cash Inflow of 1st Year+Cash Inflow of 2nd year+Cash Inflow of 3rdyear=$16,000+$5,000+$4,000=$25,000

b.

Expert Solution
Check Mark
Summary Introduction

To calculate: The NPV of the projects by using 9% discount rate for Keller Construction Company.

Introduction:

Net present value (NPV):

It is the difference between the PV (present value) of cash inflows and the PV of cash outflows. It is used in capital budgeting and planning of investment to assess the benefits and losses of any project or investment.

Present value (PV):

The current value of an investment or an asset is termed as its present value. It is calculated by discounting the future value of the investment or asset.

Answer to Problem 23P

The calculation of PV of inflows for Project E at 9%:

Foundations of Financial Management, Chapter 12, Problem 23P , additional homework tip  1

The calculation of PV of inflows for Project H at 9%:

Foundations of Financial Management, Chapter 12, Problem 23P , additional homework tip  2

Thus, the NPV of project E is $2,127 and project H is $1,976.

Explanation of Solution

The calculation of NPV of project E:

NPV=Cash InflowsCash Outflows=$22,127$20,000=$2,127

The calculation of NPV of project H:

NPV=Cash InflowsCash Outflows=$21,976$20,000=$1,976

The formulae used for the calculation of PV of inflows for Project E:

Foundations of Financial Management, Chapter 12, Problem 23P , additional homework tip  3

The formulae used for the calculation of PV of inflows for Project E:

Foundations of Financial Management, Chapter 12, Problem 23P , additional homework tip  4

c.

Expert Solution
Check Mark
Summary Introduction

To plot: The graph for the NPV of the project according to the Fig. 12-3 for the Keller Construction Company.

Introduction:

Internal rate of return (IRR):

A method of capital budgeting that is used to measure the profitability of potential projects or investments. It is a discount that makes the NPV equals to zero for a specific project.

Answer to Problem 23P

The graph for the NPV of the project according to the Fig. 12-3 for the Keller Construction Company:

Foundations of Financial Management, Chapter 12, Problem 23P , additional homework tip  5

Explanation of Solution

Calculation of IRR:

Foundations of Financial Management, Chapter 12, Problem 23P , additional homework tip  6

Working Note:

The formulae used in the calculation of IRR:

Foundations of Financial Management, Chapter 12, Problem 23P , additional homework tip  7

d.

Expert Solution
Check Mark
Summary Introduction

To determine: The decision regarding the acceptance or the rejection of the projects, if the projects are mutually exclusive and discount rate of the cost of capital is 8% for the Keller Construction Company.

Introduction:

Net present value (NPV):

It is the difference between the PV (present value) of cash inflows and the PV of cash outflows. It is used in capital budgeting and planning of investment to assess the benefits and losses of any project or investment.

Present value (PV):

The current value of an investment or an asset is termed as its present value. It is calculated by discounting the future value of the investment or asset.

Answer to Problem 23P

The calculation of PV of project E and project H at 8%:

Foundations of Financial Management, Chapter 12, Problem 23P , additional homework tip  8

The NPV of project E is $2,681 and project H is $2,277. Thus, the NPV of project E is higher than the project H. Therefore, project E must be accepted as it is more profitable than the project H.

Explanation of Solution

The calculation of NPV of project E:

NPV=Cash InflowsCash Outflows=$22,681$20,000=$2,681

The calculation of NPV of project H:

NPV=Cash InflowsCash Outflows=$22,277$20,000=$2,277

The formulae used in the calculation of PV of project E and H at 8% are shown below:

Foundations of Financial Management, Chapter 12, Problem 23P , additional homework tip  9

e.

Expert Solution
Check Mark
Summary Introduction

To determine: The decision regarding the acceptance or rejection of the projects, if the projects are mutually exclusive and discount rates of cost of capital are 6%, 13%, and 18% for the Keller Construction Company.

Introduction:

Net present value (NPV):

It is the difference between the PV (present value) of cash inflows and the PV of cash outflows. It is used in capital budgeting and planning of investment to assess the benefits and losses of any project or investment.

Present value (PV):

The current value of an investment or an asset is termed as its present value. It is calculated by discounting the future value of the investment or asset.

Answer to Problem 23P

The calculation of PV of project E and project H at 6%:

Foundations of Financial Management, Chapter 12, Problem 23P , additional homework tip  10

The NPV of project E is $3,855 and project H is $2,903. Thus, the NPV of project E is higher than the project H, So, project E must be accepted at 6% discount rate as it is superior to the project H.

The calculation of PV of project E and project H at 13%:

Foundations of Financial Management, Chapter 12, Problem 23P , additional homework tip  11

The NPV of project E is $108 and project H is $847. Thus, the NPV of project H is higher than the project E, So, project H must be accepted at 13% discount rate as it is superior to the project E.

The calculation of PV of project E and project H at 18%:

Foundations of Financial Management, Chapter 12, Problem 23P , additional homework tip  12

The NPV of project E is ($2,035) and project H is ($415). Thus, both projects must be rejected at 18% discount rate as NPV of both projects are negative.

Explanation of Solution

The calculation of NPV of project E at 6%:

NPV=Cash InflowsCash Outflows=$23,855$20,000=$3,855

The calculation of NPV of project H at 6%:

NPV=Cash InflowsCash Outflows=$22,903$20,000=$2,903

The calculation of NPV of project E at 13%:

NPV=Cash InflowsCash Outflows=$20,108$20,000=$108

The calculation of NPV of project H at 13%:

NPV=Cash InflowsCash Outflows=$20,847$20,000=$847

The calculation of NPV of project E at 18%:

NPV=Cash InflowsCash Outflows=$17,965$20,000=$2035

The calculation of NPV of project H at 18%:

NPV=Cash InflowsCash Outflows=$19,585$20,000=$415

The formulae used in the calculation of PV of project E and H at 6% are shown below:

Foundations of Financial Management, Chapter 12, Problem 23P , additional homework tip  13

The formulae used in the calculation of PV of project E and H at 13% are shown below:

Foundations of Financial Management, Chapter 12, Problem 23P , additional homework tip  14

The formulae used in the calculation of PV of project E and H at 18% are shown below:

Foundations of Financial Management, Chapter 12, Problem 23P , additional homework tip  15

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
In my accounting class I am learning to find accounting rate of return.  To solve for this I subtracted net cash flow- the salvage value divided by the initial investment.  Have I done something incorrect?
You 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)
Yokam Company is considering two alternative projects. Project 1 requires an initial investment of $420,000 and has a present value of all its cash flows of $1,350,000. Project 2 requires an initial investment of $5 million and has a present value of all its cash flows of $6 million. (a) Compute the profitability index for each project.(b) Based on the profitability index, which project should the company select?

Chapter 12 Solutions

Foundations of Financial Management

Knowledge Booster
Background pattern image
Finance
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
SEE MORE QUESTIONS
Recommended textbooks for you
Text book image
Managerial Accounting
Accounting
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:South-Western College Pub
Text book image
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Text book image
Managerial Accounting: The Cornerstone of Busines...
Accounting
ISBN:9781337115773
Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:Cengage Learning
Text book image
Financial And Managerial Accounting
Accounting
ISBN:9781337902663
Author:WARREN, Carl S.
Publisher:Cengage Learning,
Text book image
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
Text book image
Principles of Accounting Volume 2
Accounting
ISBN:9781947172609
Author:OpenStax
Publisher:OpenStax College
Capital Budgeting Introduction & Calculations Step-by-Step -PV, FV, NPV, IRR, Payback, Simple R of R; Author: Accounting Step by Step;https://www.youtube.com/watch?v=hyBw-NnAkHY;License: Standard Youtube License