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
expand_more
expand_more
format_list_bulleted
Concept explainers
Question
Chapter 10, Problem 10.23P
a)
Summary Introduction
To determine:
The
Introduction:
The difference over the present value of cash inflows and the present value of
b)
Summary Introduction
To determine:
The
Introduction:
Internal Rate of Return is a measure used in the capital budgeting which estimates the profitability of potential investments. IRR is computed as a discount rate, which makes the net present value of all cash flows from an investment as zero.
c)
Summary Introduction
To determine:
The Net Present Value profiles for each project.
Introduction:
The difference between the present value of cash inflows and the present value of cash outflows over a period of time is known as the Net Present value.
NPV profile is a graphic representation of the NPV of a project at different discount rates.
d)
Summary Introduction
To determine:
Evaluate the projects based on the NPV, IRR and NPV profile values.
Introduction:
The difference over the present value of cash inflows and the present value of cash outflows over a period is known as the Net Present value. Internal Rate of Return is a measure used in the capital budgeting which estimates the profitability of potential investments.
IRR is computed as a discount rate that makes the net present value of all cash flows from an investment as zero. NPV profile is a graphic representation of the NPV of a project at different discount rates.
e)
Summary Introduction
To determine:
The pattern of cash inflows to the projects.
Introduction:
The difference between the present value of cash inflows and the present value of cash outflows over a period of time is known as the Net Present value.
Expert Solution & Answer
Trending nowThis is a popular solution!
Students have asked these similar questions
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.
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.
Y-Bar uses IRR to evaluate projects. The company has a cost of capital of 15%
They are currently comparing two mutually exclusive projects with the following
projected cash flows:
3.
Project X
-R500 000,00-R360 000,00
Project Y
Initial Investment
Annual Cash flows
R25 000,00 R100 000,00
R60 000,00
R250 000,00 R250 000,00
R400 000,00
Year 1
Year 2
R60 000,00
Year 3
Year 4
R90 000,00
Based on the information above, which statement is most accurate:
(a)
The company will select projectY as it has the highest NPV.
(b)
The company will select project Y as it has the highest IRR.
(c)
The company will not select either project X or Y on the bases of IRR.
(d)
The company will select both project X and Y as the IRR of the projects are very similar.
(e)
None of the above
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...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Queens Soliderate is considering two mutually exclusive projects. The firm, which has a 12% cost of capital, has estimated its cash flows as shown in the following table. Project A Project B Initial investment (CF0) $130,000 $85,000 Year (t) Cash inflows (CFt) 1 $25,000 $40,000 2 35,000 35,000 3 45,000 30,000 4 50,000 10,000 5 55,000 5,000 a. Calculate the NPV of each project, and assess its acceptability. b. Calculate the IRR for each project, and assess its acceptability. Required to answer. Single line text.arrow_forwardNPV, IRR, and NPV profiles Thomas Company is considering rwo mutually enc sive projects. The firm, which has a 12% cost of capital, has estimated its cash LGO P10-23 MyLab as shown in the following table. Project A Project B Initial investment (CFe) -S130,000 -$85,000 Year (r) Cash inflows (CF S40,000 $25,000 35,000 2. 35,000 45,000 50,000 3. 30,000 10,000 5n 55,000 5,000 a. Calculate the NPV of each project, and assess its acceptability. b. Calculate the IRR for each project, and assess its acceptability. c. Draw the NPV profiles for both projects on the same set of axes. d. Evaluate and discuss the rankings of the two projects on the basis of your find- ings in parts a, b, and c. e. Explain your findings in part d in light of the pattern of cash inflows associated with each project.arrow_forwardNPV and IRR analysis of projects Thomas Company is considering two mutually exclusive projects. The firm, which has a cost of capital of 10%, has estimated its cash flows as shown in the following table: a. Calculate the NPV of each project, and assess its acceptability. b. Calculate the IRR for each project, and assess its acceptability. a. The NPV of project A is $ (Round to the nearest cent.) Enter your answer in the answer box and then click Check Answer. 7 parts remaining Clear All Check Answer 10:3 5/11 Type here to search Cuparrow_forward
- Thomas Company is considering two mutually exclusive projects. The firm, which has a cost of capital of 14%, has estimated its cash flows as shown in the following table: Project A Project B Initial investment (CF0) $150,000 $83,000 Year (t) Cash inflows (CFt) 1 $20,000 $45,000 2 $35,000 $25,000 3 $40,000 $35,000 4 $50,000 $10,000 5 $70,000 $15,000 a. Calculate the NPV of each project, and assess its acceptability. b. Calculate the IRR for each project, and assess its acceptability.arrow_forwardFollowing is information on two alternative investment projects being considered by Tiger Company. The company requires an 8% return from its investments. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) Project X1 Project X2 Initial investment $ (108,000) $ (176,000) Net cash flows in: Year 1 39,000 81,000 Year 2 49,500 71,000 Year 3 74,500 61,000 a. Compute each project’s net present value.b. Compute each project’s profitability index.c. If the company can choose only one project, which should it choose on the basis of profitability index?arrow_forwardA company is analyzing two mutually exclusive projects, with the cash flows below. If their WACC is 8.5%, what is the IRR of each? Strictly based on IRR, which project should the company go with? Time Project A Project B 0 -$1,000 -$1,000 1 $870 $0 2 $250 $250 3 $25 $400 4 $25 $845arrow_forward
- Following is information on two alternative investment projects being considered by Tiger Company. The company requires a 5% return from its investments. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) Project X1 Project X2 Initial investment $ (102,000) $ (164,000) Net cash flows in: Year 1 36,000 76,500 Year 2 46,500 66,500 Year 3 71,500 56,500 a. Compute each project’s net present value.b. Compute each project’s profitability index.c. If the company can choose only one project, which should it choose on the basis of profitability index? Please answer "C" as well. I wasn't able to include that in the imagesarrow_forwardFollowing is information on two alternative investments projects being considered by Tiger Company. The company requires a 10% return from its investments. (PV of $1, FV of $1, PVA of $1, and FVA of $1) Note: Use appropriate factor(s) from the tables provided. Initial investment Project X1 $ (98,000) Project X2 $ (144,000) Net cash flows in: Year 1 36,000 76,500 Year 2 46,500 Year 3 71,500 66,500 56,500 a. Compute each project's net present value. b. Compute each project's profitability index. If the company can choose only one project, which should it choose on the basis of profitability index? Complete this question by entering your answers in the tabs below. Required A Required B Compute each project's net present value. Note: Round your answers to the nearest whole dollar. Net Cash Flows Present Value of 1 at 10% Present Value of Net Cash Flows Project X1 Year 1 $ 36,000 Year 2 46,500 Year 3 71,500 Totals $ 154,000 $ 0 Initial investment Net present value $ Project X2 Year 1 $…arrow_forwardProjects 1 and 2, of equal risk, are alternatives for expanding X Company's capacity. The firm's cost of capital is 13%. The cash flows for each project are shown in the following table: Project 1 Project 2 Initial investment $60,000 $30,000 Year Cash inflows 1 $10,000 $10,000 2 $15,000 $10,000 3 $20,000 $10,000 4 $25,000 $10,000 5 $30,000 $10,000 Your Answer: (Round to two decimal places.) a. The payback period of Project 1 is The payback period of Project 2 is b. The NPV of Project 1 is $ The NPV of Project 2 is $ c. The IRR of Project 1 is The IRR of Project 2 is d. Which project will you recommend? Project %. %. years. years.arrow_forward
- 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 ONES IN BOLD (4,5,6)arrow_forwardProjects A and B, of equal risk, are alternatives for expanding Rosa Company's capacity. The firm's cost of capital is 13%. The cash flows for each project are shown in the following table. Project A Project B Initial Investment -$80,000 -$50,000 Year Cash Flow Cash Flow 1 $15,000 $15,000 2 $20,000 $15,000 3 $25,000 $15,000 4 $30,000 $15,000 5 $35,000 $15,000 a.) calculate each project's payback period. b.) calculate the net present value for each project. c.) calculate the internal rate of return for each project. d.) draw the net present value profiles for both projects on the same set of axes and discuss any conflict in ranking that may exist between NPV and IRR. e.) Summarize the preferences dictated by each measure and indicate which project you would recommend. Explain why.arrow_forwardAssume 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)arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College Pub
Managerial Accounting
Accounting
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:South-Western College Pub