Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 5, Problem 14PS
Profitability index Look again at projects D and E in Section 5-3. Assume that the projects are mutually exclusive and that the
- a. Calculate the profitability index for each project.
- b. Show how the profitability-index rule can be used to select the superior project.
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Students have asked these similar questions
According to the profitability index criterion, a project is acceptable if its profitability index is greater than ____.
a.
0
b.
1.1
c.
or equal to 1
d.
1 plus the cost of capital
Profitability index. Given the discount rate and the future cash flow of each project listed in the following table,
, use the PI to determine which projects the company should accept.
.....
What is the Pl of project A?
(Round to two decimal places.)
Internal rate of return and modified internal rate of return For the project shown in the following table,, calculate the internal rate of return (IRR) and modified internal rate of return (MIRR). If the cost of
capital is 12.13%, indicate whether the project is acceptable according to IRR and MIRR.
The project's IRR is %. (Round to two decimal places.)
Data table
(Click on the icon here in order to copy the contents of the data table below
into a spreadsheet.)
Initial investment (CF)
Year (t)
1
2
3
4
5
Print
$70,000
Cash inflows
(CFt)
$15,000
$25,000
$25,000
$15,000
$10,000
Done
X
Chapter 5 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 5 - (IRR) Check the IRRs for project F in Section 5-3.Ch. 5 - (IRR) What is the IRR of a project with the...Ch. 5 - (XIRR) What is the IRR of a project with the...Ch. 5 - Payback a. What is the payback period on each of...Ch. 5 - IRR Write down the equation defining a projects...Ch. 5 - Prob. 3PSCh. 5 - IRR rule You have the chance to participate in a...Ch. 5 - IRR rule Consider a project with the following...Ch. 5 - IRR rule Consider projects Alpha and Beta: The...Ch. 5 - Capital rationing Suppose you have the following...
Ch. 5 - Payback Consider the following projects: a. If the...Ch. 5 - Prob. 9PSCh. 5 - IRR Calculate the IRR (or IRRs) for the following...Ch. 5 - IRR rule Consider the following two mutually...Ch. 5 - IRR rule Mr. Cyrus Clops, the president of Giant...Ch. 5 - Prob. 13PSCh. 5 - Profitability index Look again at projects D and E...Ch. 5 - Prob. 15PSCh. 5 - Prob. 16PS
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- Compute the Profitability Index (PI) for each project? Project A Project B Profitability Index (PI) 5- In light of your answers above, suppose that these two projects might be mutually exclusive or independent. According to these two assumptions, fill in the blanks in the table below with the suitable answer: Points Investment Criteria If A and B are mutually exclusive, then I would select If A and B are independent, then I would select PBP NPV IRR PIarrow_forwardOxford Company has limited funds available for investment and must ration the funds among four competing projects. Selected information on the four projects follows: Life of Net the Internal Project (years) of Return Investment Present Rate Project Required $970,000 $730,000 $670,000 $830,000 Value $176,514 $175,933 $185,782 $129,082 A 6. 16% В 11 15% C 19% 17% The net present values above have been computed using a 10% discount rate. The company wants your assistance in determining which project to accept first, second, and so forth.arrow_forwarda. Calculate the projects’ NPVs, IRRs, MIRRs, regular paybacks, and discounted paybacks.b. If the two projects are independent, which project(s) should be chosen?c. If the two projects are mutually exclusive and the WACC is 10%, which project(s)should be chosen?d. Plot NPV profiles for the two projects. Identify the projects’ IRRs on the graph.e. If the WACC was 5%, would this change your recommendation if the projects weremutually exclusive? If the WACC was 15%, would this change your recommendation?Explain your answers.f. The crossover rate is 13.5252%. Explain what this rate is and how it affects the choicebetween mutually exclusive projects.g. Is it possible for conflicts to exist between the NPV and the IRR when independentprojects are being evaluated? Explain your answer.h. Now look at the regular and discounted paybacks. Which project looks better whenjudged by the paybacks?i. If the payback was the only method a firm used to accept or reject projects, what paybackshould it…arrow_forward
- K Internal rate of return and modified internal rate of return For the project shown in the following table,, calculate the internal rate of return (IRR) and modified internal rate of return (MIRR). If the cost of capital is 13.04%, indicate whether the project is acceptable according to IRR and MIRR. The project's IRR is %. (Round to two decimal places.) Data table (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) Initial investment (CFO) Year (t) $80,000 Cash inflows (CF₂) 1 $10,000 2345 $25,000 $10,000 $15,000 $45,000 Print Done -arrow_forwardThe table below shows the internal rate of return (IRR%) for three investment projects A, B and C and their differences. According to capital investment A С>В b. A>B>C C. C>B>A d. B>C>A е. С>А>Вarrow_forwardWhich of the following statements is CORRECT? a. The NPV profile graph for a normal project will generally have a positive (upward) slope as the life of the project increases. b. An NPV profile graph shows how a project's payback varies as the cost of capital changes. O c. An NPV profile graph is designed to give decision makers an idea about how a project's contribution to the firm's value varies with the cost of capital. d. An NPV profile graph is designed to give decision makers an idea about how a project's risk varies with its life. e. We cannot draw a project's NPV profile unless we know the appropriate WACC for use in evaluating the project's NPV.arrow_forward
- 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 QUESTIONSarrow_forwardwhich of the following could potentially impact the NPV of a project? 1. initial investment amount 2. book value of the initial investment at the end of the project 3. opportunity costs 4. sunk costs a. 1 and 3 b. 1,2,3 and 4 c. 1,2 and 3 d. 1,2 and 4 e. 1 and 2arrow_forwardInternal rate of return For the project shown in the following table, calculate the internal rate of return (IRR). Then indicate, for the project, the maximum cost of capital that the firm could have and still find the IRR acceptable. The project's IRR is %. (Round to two decimal places.) Data Table (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) Initial investment (CF,) $100,000 Year (t) Cash inflows (CF;) $10,000 $10,000 $45,000 $30,000 $35,000 1 4 5 Print Donearrow_forward
- Using image: a-1. What is the payback period for each project a-2. If you apply the payback criterion, which investment will you choose? b-1. What is the discounted payback period for each project? b-2. If you apply the discounted payback criterion, which investment will you choose? c-1. What is the NPV for each project? c-2. If you apply the NPV criterion, which investment will you choose? d-1. What is the IRR for each project? d-2. If you apply the IRR criterion, which investment will you choose? e-1. What is the profitability index for each project? e-2. If you apply the profitability index criterion, which investment will you choose? f. Based on your answers in (a) through (e), which project will you finally choose?arrow_forwardInternal rate of return For the project shown in the following table, calculate the internal rate of return (IRR). Then indicate, for the project, the maximum cost of capital that the firm could have and still find the IRR acceptable.arrow_forwardQ1) How much is the Profitability Index? Q2) What is the Discounted Payback period of the project? Q3) What is the NPV of the Project?arrow_forward
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