Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
15th Edition
ISBN: 9780134476315
Author: Chad J. Zutter, Scott B. Smart
Publisher: PEARSON
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Textbook Question
Chapter 10, Problem 10.1STP
All techniques with NPV profile: Mutually exclusive projects Fitch Industries is in the process of choosing the better of two equal-risk, mutually exclusive capital expenditure projects, M and N. The relevant cash flows for each project are shown in the following table The firm’s cost of capital is 9%.
| Project M | Project N | |
| Initial investment (CF0) | –$40,000 | –$40,000 |
| Year(t) | ||
| 1 | $14,000 | $23,000 |
| 2 | 14,000 | 12,000 |
| 3 | 14,000 | 10,000 |
| 4 | 14,000 | 9,000 |
- a. Calculate each project’s payback period.
- b. Calculate the
net present value (NPV) for each project. - c. Calculate the
internal rate of return (IRR) for each project. - d. Summarize the preferences dictated by each measure you calculated, and indicate which project you would recommend. Explain why.
- e. Draw the net present value profiles for these projects on the same set of axes, and explain the circumstances under which a conflict in ran kings might exist.
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Problem 1: Fitch Industries is in the process of choosing the better of two equal-risk, mutually
exclusive capital expenditure projects-M and N. The relevant cash flows for each project are
shown in the following table. The firm's cost of capital is 14%.
Project M
Project N
Initial investmecnt (CF)
528,500
527,000
Year (t)
Cash inflows (CF)
$10,000
10,000
10,000
10,000
$11,000
2.
10,000
9,000
4.
8,000
a. Calculate each project's payback period.
b. Calculate the net present value (NPV) for each project.
c. Calculate the internal rate of return (IRR) for each project.
d. Summarize the preferences dictated by each measure you calculated and
indicate which project you would recommend. Explain why.
Consider the following projects:
Cash Flows ($)
Project
D
E
CO00 C101
-11,700 23,400
-21,700 37,975
Assume that the projects are mutually exclusive and that the opportunity cost of
capital is 12%.
a. Calculate the profitability index for each project.
b-1. Calculate the profitability-index using the incremental cash flows.
b-2. Which project should you choose?
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
Sketch the NPV profile for projects A & B.
Determine the crossover point for these projects’ NPV profiles.
Chapter 10 Solutions
Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
Ch. 10.1 - What is the financial managers goal in selecting...Ch. 10.2 - What is the payback period? How is it calculated?Ch. 10.2 - What weaknesses are commonly associated with the...Ch. 10.3 - How is the net present value (NPV) calculated for...Ch. 10.3 - Prob. 10.5RQCh. 10.3 - Prob. 10.6RQCh. 10.4 - Prob. 10.8RQCh. 10.4 - Prob. 10.9RQCh. 10.4 - Prob. 10.10RQCh. 10.5 - How is a net present value profile used to compare...
Ch. 10.5 - Prob. 10.13RQCh. 10 - Prob. 1ORCh. 10 - All techniques with NPV profile: Mutually...Ch. 10 - Elysian Fields Inc. uses a maximum payback period...Ch. 10 - Prob. E10.1WUECh. 10 - Prob. 10.2WUECh. 10 - Prob. E10.2WUECh. 10 - Axis Corp. is considering investment in the best...Ch. 10 - Prob. E10.3WUECh. 10 - Prob. 10.4WUECh. 10 - Prob. E10.4WUECh. 10 - Cooper Electronics uses NPV profiles to visually...Ch. 10 - Prob. E10.5WUECh. 10 - Payback period The Ball Shoe Company is...Ch. 10 - Payback comparisons Nova Products has a 5-year...Ch. 10 - Prob. 10.3PCh. 10 - Long-term investment decision, payback method Bill...Ch. 10 - Prob. 10.5PCh. 10 - Prob. 10.6PCh. 10 - Prob. 10.7PCh. 10 - Prob. 10.8PCh. 10 - Prob. 10.9PCh. 10 - Prob. 10.10PCh. 10 - Prob. 10.11PCh. 10 - Prob. 10.12PCh. 10 - NPV and EVA A project costs 2,500,000 up front and...Ch. 10 - Prob. 10.14PCh. 10 - Prob. 10.15PCh. 10 - Prob. 10.16PCh. 10 - Prob. 10.17PCh. 10 - Prob. 10.18PCh. 10 - Prob. 10.19PCh. 10 - Prob. 10.20PCh. 10 - Prob. 10.21PCh. 10 - Prob. 10.22PCh. 10 - Prob. 10.23PCh. 10 - Prob. 10.24PCh. 10 - All techniques with NPV profile: Mutually...Ch. 10 - Integrative: Multiple IRRs Froogle Enterprises is...Ch. 10 - Integrative: Conflicting Rankings The High-Flying...Ch. 10 - Problems with IRR White Rock Services Inc. has an...Ch. 10 - ETHICS PROBLEM Diane Dennison is a financial...Ch. 10 - Spreadsheet Exercise The Drillago Company is...
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