UPENN: LOOSE LEAF CORP.FIN W/CONNECT
17th Edition
ISBN: 9781260361278
Author: Ross
Publisher: McGraw-Hill Publishing Co.
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Chapter 6, Problem 15QP
Capital Budgeting with Inflation Consider the following cash flows on two mutually exclusive projects:
| Year | Project A | Project B |
| 0 | –$30,000 | –$45,000 |
| 1 | 18,000 | 21,000 |
| 2 | 16,000 | 23,000 |
| 3 | 12,000 | 25,000 |
The cash flows of Project A are expressed in real terms, whereas those of Project B are expressed in nominal terms. The appropriate nominal discount rate is 13 percent and the inflation rate is 4 percent. Which project should you choose?
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Question 4: Capital Budgeting
a). Consider the following two mutually exclusive projects:
YEAR
0
CASH FLOW (A)
-$300,000
1
20,000
2
70,000
3
80,000
4
400,000
CASH FLOW (B)
-$39,000
18,000
12,000
18,000
19,000
Whichever project you choose, if any, you require a 15 percent return on your investment.
(i) If you apply the payback period (PBP) criterion, which investment will you choose?
Why?
(ii) If you apply the net present value (NPV) criterion, which investment will you choose?
Why?
(iii)If you apply the profitability index (PI) criterion, which investment will you choose?
Why?
(iv) If you apply the internal rate of return (IRR) criterion, which investment will you choose?
Why?
(v) Based on your answers in (i) through (iv), which project will you finally choose? Why?
Examiner: Prof. Ebenezer Bugri Anarfo
Page 9
b). You are trying to determine whether to expand your business by building a new
manufacturing plant. The plant has an installation cost of $15 million, which will be…
Consider the following cash flows on two mutually exclusive projects:
Year
Project A
Project B
0
−$
63,000
−$
78,000
1
43,000
42,000
2
38,000
51,000
3
33,000
54,000
The cash flows of Project A are expressed in real terms while those of Project B are expressed in nominal terms. The appropriate nominal discount rate is 12 percent and the inflation rate is 5 percent.
Calculate the NPV for each project
A project has the following cash flows :
Year
Cash Flows
0
−$ 12,100
1
5,350
2
7,720
3
5,120
4
−1,560
Assuming the appropriate interest rate is 7 percent, what is the MIRR for this project using the discounting approach?
Chapter 6 Solutions
UPENN: LOOSE LEAF CORP.FIN W/CONNECT
Ch. 6 - Opportunity Cost In the context of capital...Ch. 6 - Prob. 2CQCh. 6 - Incremental Cash Flows Your company currently...Ch. 6 - Depreciation Given the choice, would a firm prefer...Ch. 6 - Prob. 5CQCh. 6 - Prob. 6CQCh. 6 - Equivalent Annual Cost When is EAC analysis...Ch. 6 - Prob. 8CQCh. 6 - Capital Budgeting Considerations A major college...Ch. 6 - To answer the next three questions, refer to the...
Ch. 6 - Prob. 11CQCh. 6 - To answer the next three questions, refer to the...Ch. 6 - Calculating Project NPV Flatte Restaurant is...Ch. 6 - Calculating Project NPV The Best Manufacturing...Ch. 6 - Calculating Project NPV Down Under Boomerang,...Ch. 6 - Calculating Project Cash Flow from Assets In the...Ch. 6 - Prob. 5QPCh. 6 - Project Evaluation Your firm is contemplating the...Ch. 6 - Project Evaluation Dog Up! Franks is looking at a...Ch. 6 - Prob. 8QPCh. 6 - Calculating NPV Howell Petroleum is considering a...Ch. 6 - Calculating EAC You are evaluating two different...Ch. 6 - Cost-Cutting Proposals Massey Machine Shop is...Ch. 6 - Prob. 12QPCh. 6 - Prob. 13QPCh. 6 - Comparing Mutually Exclusive Projects Vandalay...Ch. 6 - Capital Budgeting with Inflation Consider the...Ch. 6 - Prob. 16QPCh. 6 - Prob. 17QPCh. 6 - Cash flow Valuation Phillips Industries runs a...Ch. 6 - Equivalent Annual Cost Bridgton Golf Academy is...Ch. 6 - Prob. 20QPCh. 6 - Prob. 21QPCh. 6 - Prob. 22QPCh. 6 - Calculating Project NPV With the growing...Ch. 6 - Calculating Project NPV You have been hired as a...Ch. 6 - Calculating Project NPV Pilot Plus Pens is...Ch. 6 - EAC and Inflation Office Automation, Inc., must...Ch. 6 - Project Analysis and Inflation Dickinson Brothers,...Ch. 6 - Project Evaluation Aday Acoustics, Inc., projects...Ch. 6 - Calculating Required Savings A proposed...Ch. 6 - Calculating a Bid Price Another utilization of...Ch. 6 - Prob. 31QPCh. 6 - Prob. 32QPCh. 6 - Replacement Decisions Suppose we are thinking...Ch. 6 - Prob. 34QPCh. 6 - Project Analysis and Inflation The Biological...Ch. 6 - Prob. 36QPCh. 6 - Prob. 37QPCh. 6 - Prob. 38QPCh. 6 - Prob. 1MC1Ch. 6 - GOODWEEK TIRES, INC. After extensive research and...
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