CORP FIN--CONNECT ONLY+PROCTORIO+180 DAY
CORP FIN--CONNECT ONLY+PROCTORIO+180 DAY
12th Edition
ISBN: 9781266118562
Author: Ross
Publisher: MCG
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Chapter 5, Problem 17QAP

a.

Summary Introduction

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.

Summary Introduction

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 NPV of each of the three projects

Introduction: NPV is the net of the present value of aggregate cash inflows and cash outflows associated with a project. A project with a positive NPV is preferable.

c.

Summary Introduction

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.

Summary Introduction

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.

Summary Introduction

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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