Assume two mutually exclusive projects have the estimated net incrementalafter-tax cash flows shown below. The company's required rate of retum is12%. For each project, compute a) the net present value, b) intemal rate ofreturn, c) profitability index and d) the payback period. e) State which projectshould be chosen and why.ProjectInitial investmentAnnual after-tax cash flowsYear 1Year 2Year 3Year 4Year 5Year 6AB$100,000$150,00020,00030,00040,00050,00060,00039,00039,00039,00039,00039,00039,000

NPV is the net current worth of cash flows that have occurred in the past or present. It is computed…

Answered: Assume two mutually exclusive projects…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 7P

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Project S has a cost of $10,000 and is expected to produce benefits (cash flows) of $3,000 per year for 5 years. Project L costs $25,000 and is expected to produce cash flows of $7,400 per year for 5 years. Calculate the two projects’ NPVs, IRRs, MIRRs, and PIs, assuming a cost of capital of 12%. Which project would be selected, assuming they are mutually exclusive, using each ranking method? Which should actually be selected?
Assume two mutually exclusive projects have the estimated net incremental after-tax cash flows shown below. The company's required rate of retun is 12%. For each project, compute a) the net present value, b) intemal rate of return, c) profitability index and d) the payback period. e) State which project should be chosen and why Project A Initial investment Annual after-tax cash flows Year 1 Year 2 Year 3 Year 4 Year 5 $100,000 $150,000 39,000 39,000 39,000 39,000 39,000 39,000 20,000 30,000 40,000 50,000 60,000 Year 6
Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 −$29,000 −$29000 1 14,400 4,300 2 12,300 9,800 3 9,200 15,200 4 5,100 16,800 a) What is the Internal Rate of Return (IRR) for each of these projects? b) Using the IRR decision rule, which project should the company accept? c) If the required return is 11 percent, what is the Net Present Value (NV) for each of these projects? d) Using the NPV decision rule, which project should the company accept? e) Why do you think the NPV and IRR rules do not agree on same project approval/rejection direction?
Case 1: Assume you are evaluating two mutually exclusive projects,the cash flows of which appear below, and that your company uses a cost of capital of 8 percent to evaluate projects such as these. Time Project A Cash Flow Project B Cash Flow 0 -$650 -$700 1 100 300 2 250 -200 3 250 550 4 200 200 5 100 80 a. Calculate the payback of Project A. b. Calculate the discounted payback of Project A. c. Calculate the IRR of Project A. d. Using the NPV method and assuming a cost of capital of 8 percent, which of these projects should be accepted?
Consider the following after-tax cash flows: (a) Compute the project balances for Projects A and D, as a function of project year, at i = 10%.(b) Compute the future worth values for Projects A and D at i = 10% at theend of service life.(c) Suppose that Projects Band Care mutually exclusive. Assume also that the required service period is eight years and that the company is considering leasing comparable equipment that has an annual lease expense of $3,000 for the remaining years of the required service period. Which project is the better choice?
Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) -$ 15,456 5,225 8,223 13,013 8,705 0 1 234 -$ 276,363 26,400 51,000 57,000 402,000 Whichever project you choose, if any, you require a 6 percent return on your investment. a. What is the payback period for Project A? Payback period b. What is the payback period for Project B? Payback period c. What is the discounted payback period for Project A? Discounted payback period
Consider the cash flows of the following investment projects (MARR = 15%): (a) Assume that A and B are mutually exclusive projects. Which project is selected according to the AE criteria? (b) Suppose B and C are mutually exclusive projects. Which project is selected according to the AE criteria?
The following are the cash flows of two projects: Project B Year Project A $ (300) 0 $ (300) 1 180 200 2 180 200 3 180 200 4 180 If the opportunity cost of capital is 12%, what is the profitability index for each project? Note: Do not round intermediate calculations. Round your answers to 4 decimal places. Project A B Profitability Index
Assume you are evaluating two mutually exclusive projects, the cash flows of which appear below and that your company uses a cost of capital of 13% to evaluate projects such as these. Time Project A Cash Flows Project B Cash Flows 0 -$46,800 -$63,600 1 -21,600 20,400 2 43,200 20,400 3 43,200 20,400 4 43,200 20,400 5 -28,800 20,400 Calculate the payback period and discounted payback period for projects A & B. Calculate the IRR and MIRR of projects A & B. Assume a reinvestment rate of 13% for the calculation of MIRR. Sketch the NPV profile for projects A & B. Determine the crossover point for these projects’ NPV profiles. Assuming a cost of capital of 14%, which of these projects should be accepted? Under what conditions on the cost of capital should project B be preferred to project A? If Project A and Project B are independent, which project should be undertaken?
Assume you are evaluating two mutually exclusive projects, the cash flows of which appear below and that your company uses a cost of capital of 13% to evaluate projects such as these. Time Project A Cash Flows Project B Cash Flows 0 -$46,800 -$63,600 1 -21,600 20,400 2 43,200 20,400 3 43,200 20,400 4 43,200 20,400 5 -28,800 20,400 Calculate the payback period and discounted payback period for projects A & B. Calculate the IRR and MIRR of projects A & B. Assume a reinvestment rate of 13% for the calculation of MIRR. Sketch the NPV profile for projects A & B. Determine the crossover point for these projects’ NPV profiles. Assuming a cost of capital of 14%, which of these projects should be accepted? Under what conditions on the cost of capital should project B be preferred to project A? If Project A and Project B are independent, which project should be undertaken? PLEASE ANSWER THE ONE IN BOLD (7)
31. Assume two mutually exclusive projects have the estimated net incremental after-tax cash flows shown below. The company's required rate of return is 12%. For each project, compute a) the net present value, b) intenal rate of return, c) profitability index and d) the payback period. e) State which project should be chosen and why. Project Initial investment Annual after-tax cash flows Year 1 Year 2 Year 3 $100,000 $150,000 20,000 30,000 40,000 50,000 60,000 39,000 39,000 39,000 39,000 39,000 39,000 Year 4 Year 5 Year 6
Consider the cash flows for the following investment projects: (a) For Project A. find the value of X that makes the equivalent annual receiptsequal the equivalent annual disbursement at i = 13%.(b) Would you accept Project Bat i = 15% based on the AE criterion?

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