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a.
Adequate information:
Cash flows of Project A in Year 0= -$225,000
Cash flows of Project A in Year 1= $165,000
Cash flows of Project A in Year 2= $165,000
Cash flows of Project B in Year 0 = -$450,000
Cash flows of Project B in Year 1= $300,000
Cash flows of Project B in Year 2= $300,000
Cash flows of Project C in Year 0 = -$225,000
Cash flows of Project C in Year 1= $180,000
Cash flows of Project C in Year 2 = $135,000
To compute: Profitability index for each of the three projects.
Introduction: The profitability index is a budgeting technique that evaluates various investment proposals based on profitability.
b.
Adequate information:
Cash flows of Project A in Year 0= -$225,000
Cash flows of Project A in Year 1= $165,000
Cash flows of Project A in Year 2= $165,000
Cash flows of Project B in Year 0 = -$450,000
Cash flows of Project B in Year 1= $300,000
Cash flows of Project B in Year 2= $300,000
Cash flows of Project C in Year 0 = -$225,000
Cash flows of Project C in Year 1= $180,000
Cash flows of Project C in Year 2 = $135,000
To compute: The
Introduction: NPV is the net of the present value of aggregate
c.
Adequate information:
Cash flows of Project A in Year 0= -$225,000
Cash flows of Project A in Year 1= $165,000
Cash flows of Project A in Year 2= $165,000
Cash flows of Project B in Year 0 = -$450,000
Cash flows of Project B in Year 1= $300,000
Cash flows of Project B in Year 2= $300,000
Cash flows of Project C in Year 0 = -$225,000
Cash flows of Project C in Year 1= $180,000
Cash flows of Project C in Year 2 = $135,000
To determine: The project that should be accepted based on the profitability index rule if all three projects are independent.
Introduction: The profitability index rule is the defined statement based on which investment projects are considered good or bad.
d.
Adequate information:
Cash flows of Project A in Year 0= -$225,000
Cash flows of Project A in Year 1= $165,000
Cash flows of Project A in Year 2= $165,000
Cash flows of Project B in Year 0 = -$450,000
Cash flows of Project B in Year 1= $300,000
Cash flows of Project B in Year 2= $300,000
Cash flows of Project C in Year 0 = -$225,000
Cash flows of Project C in Year 1= $180,000
Cash flows of Project C in Year 2 = $135,000
To determine: The project that should be accepted based on the profitability index rule if all the three projects are mutually exclusive.
Introduction: The projects are mutually exclusive when acceptance of a project depends on the other.
e.
Adequate information:
Cash flows of Project A in Year 0= -$225,000
Cash flows of Project A in Year 1= $165,000
Cash flows of Project A in Year 2= $165,000
Cash flows of Project B in Year 0 = -$450,000
Cash flows of Project B in Year 1= $300,000
Cash flows of Project B in Year 2= $300,000
Cash flows of Project C in Year 0 = -$225,000
Cash flows of Project C in Year 1= $180,000
Cash flows of Project C in Year 2 = $135,000
Budget for the projects= $450,000
To determine: The project that should be accepted if the projects are not divisible.
Introduction: NPV is the net present value of aggregate cash inflows and cash outflows associated with a project. A project with a positive NPV is preferable.
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Chapter 5 Solutions
CORPORATE FINANCE--CONNECT ACCESS CARD
- Ned's Co. has an average collection period of 45 days and an operating cycle of 130 days. It has a policy of keeping at least $10 on hand as a minimum cash balance, and has a beginning cash balance for the first quarter of $20. Beginning receivables for the quarter amount to $35. Sales for the first and second quarters are expected to be $110 and $125, respectively, while purchases amount to 80% of the next quarter's forecast sales. The accounts payable period is 90 days. What are the cash disbursements for the first quarter? Question 4 options: $92 $88 $76 $100 $110arrow_forwardLiberal credit terms for customers is associated with a restrictive short-term financial policy. Question 3 options: True Falsearrow_forwardAn accounts payable period decrease would increase the length of a firm's cash cycle. Consider each in isolation. Question 6 options: True Falsearrow_forward
- Which of the following is the best definition of cash budget? Question 10 options: Costs that rise with increases in the level of investment in current assets. A forecast of cash receipts and disbursements for the next planning period. A secured short-term loan that involves either the assignment or factoring of the receivable. The time between sale of inventory and collection of the receivable. The time between receipt of inventory and payment for it.arrow_forwardShort-term financial decisions are typically defined to include cash inflows and outflows that occur within __ year(s) or less. Question 9 options: Four Two Three Five Onearrow_forwardA national firm has sales of $575,000 and cost of goods sold of $368,000. At the beginning of the year, the inventory was $42,000. At the end of the year, the inventory balance was $45,000. What is the inventory turnover rate? Question 8 options: 8.46 times 13.22 times 43.14 times 12.78 times 28.56 timesarrow_forward
- The formula (Cash cycle + accounts payable period) correctly defines the operating cycle. Question 7 options: False Truearrow_forwardAn accounts payable period decrease would increase the length of a firm's cash cycle. Consider each in isolation. Question 6 options: True Falsearrow_forwardWhich of the following issues is/are NOT considered a part of short-term finance? Question 5 options: The amount of credit that should be extended to customers The firm determining whether to issue commercial paper or obtain a bank loan The amount of the firms current income that should be paid out as dividends The amount the firm should borrow short-term A reasonable level of cash for the firm to maintainarrow_forward
- Liberal credit terms for customers is associated with a restrictive short-term financial policy. Question 3 options: True Falsearrow_forwardAn increase in fixed assets is a source of cash. Question 2 options: True Falsearrow_forwardIf the initial current ratio for a firm is greater than one, then using cash to purchase marketable securities will decrease net working capital. True or falsearrow_forward
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