Finance: Chapter 9
0 -$ 17,200 1 9,500 2 8,400 3 4,900 What is the profitability index for the set of cash flows if the relevant discount rate is 10 percent? What is the profitability index for the set of cash flows if the relevant discount rate is 15 percent? What is the profitability index for the set of cash flows if the relevant discount rate is 22 percent?
1.12 1.04 .94 Use CF but for the initial, use 0 Divide NPV by Initial
The Sloan Corporation is trying to choose between the following two mutually exclusive design projects: 0 -$ 71,000 -$ 17,300 1 33,000 9,350 2 33,000 9,350 3 33,000 9,350 If the required return is 12 percent, what is the profitability index for both projects? If the company applies the profitability index decision rule, which project should the firm accept? What is the NPV for both projects? If the company applies the NPV decision rule, which project should it take?
1.12 and 1.30 Project 2 Use CF, initial is 0. Calc for NPV/initial 8,260.43 5,157.12 Project 1
Consider the following two mutually exclusive projects: 0 -$ 20,800 -$ 20,800 1 9,050 10,500 2 9,500 8,000 3 9,000 8,900 Calculate the IRR for each project. What is the crossover rate for these two projects? What is the NPV of Projects X and Y at discount rates of 0%, 15%, and 25%?
15.49 15.69 9.73% 6,750.00 170.58 -2,872.00 6,600.00 231.48 -2723.20 Use Calc CF Crossover: Subtract A-B and make new CF. Find IRR
A firm evaluates all of its projects by applying the IRR rule. A project under consideration has the following cash flows: 0 -$ 27,700 1 11,700 2 14,700 3 10,700 If the required return is 18 percent, what is the IRR for this project? Should the firm accept the project?
16.37% no CF0= -27700 CF1= 11700 CF2= 14700 CF3=10700 IRR CPT
Garage, Inc., has identified the following two mutually exclusive projects: 0 -$ 28,600 -$ 28,600 1 14,000 4,100 2 11,900 9,600 3 9,000 14,800 4 4,900 16,400 What is the IRR for each of these projects? Using the IRR decision rule, which project should the company accept? Is this decision necessarily correct? If the required return is 10 percent, what is the NPV for each of these projects? Which project will the company choose if it applies the NPV decision rule? At what discount rate would the company be indifferent between these two projects?
17.61 16.87, Project A, No 4,070.58 5,382.04 15.18 Subject numbers of Project A-B and put in as a new CF. CPT IRR
RAK Corp. is evaluating a project with the following cash flows: 0 -$ 29,100 1 11,300 2 14,000 3 15,900 4 13,000 5 - 9,500 The company uses an interest rate of 8 percent on all of its projects. Calculate the MIRR of the project using the discounting approach. Calculate the MIRR of the project using the reinvestment approach. Calculate the MIRR of the project using the combination approach.
18.62 Make all negatives their PV with the initial -9500/(1.08^5)=6465.54 - 29100= -35565.54 (new Init) Use Calc for CF with new initial and 0 for Year 5 14.03% Find NPV using CF and using 0 as initial = 38177.49 Find FV: N=5 I/Y=8 PV=-38177.49 PMT=0 56095.258 0 = -$29,100 + $56,095.25 / (1 + MIRR)^5 $56,095.25 / $29,100 = (1 + MIRR)^5 MIRR = ($56,095.25 / $29,100)^1/5 - 1 MIRR = .1403, or 14.03% find the value of all cash outflows at Time 0, and the value of all cash inflows at the end of the project. So, the value of the cash flows is: Time 0 cash flow = -$29,100 - $9,500 / 1.08^5 Time 0 cash flow = -$35,565.54 Time 5 cash flow = $11,300(1.08^4) + $14,000(1.08^3) + $15,900(1.08^2) + $13,000(1.08) Time 5 cash flow = $65,595.25 So, the MIRR using the combination approach is: 0 = -$35,565.54 + $65,595.25 / (1 + MIRR)^5 $65,595.252 / $35,565.54 = (1 + MIRR)^5 MIRR = ($65,595.25 / $35,565.54)^1/5 - 1 MIRR = .1302, or 13.02%
RAK Corp. is evaluating a project with the following cash flows: 0 -$ 28,600 1 10,800 2 13,500 3 15,400 4 12,500 5 - 9,000 The company uses a discount rate of 13 percent and a reinvestment rate of 6 percent on all of its projects. Calculate the MIRR of the project using the discounting approach. Calculate the MIRR of the project using the reinvestment approach. Calculate the MIRR of the project using the combination approach.
19.74 -9000/(1.13^5) -28600 =Ans Put in place for CF Time 5 cash flow = $10,800(1.064) + $13,500(1.063) + $15,400(1.062) + $12,500(1.06) - $9,000 Time 5 cash flow = $51,266.91 So, the MIRR using the discounting approach is: 0 = -$28,600 + $51,266.91 / (1 + MIRR)^5 $51,266.91 / $28,600 = (1 + MIRR)^5 MIRR = ($51,266.91 / $28,600)^1/5 - 1 MIRR = .1238, or 12.38% Time 0 cash flow = -$28,600 - $9,000 / 1.135 Time 0 cash flow = -$33,484.84 Time 5 cash flow = $10,800(1.06^4) + $13,500(1.06^3) + $15,400(1.06^2) + $12,500(1.06) Time 5 cash flow = $60,266.91 So, the MIRR using the discounting approach is: 0 = -$33,484.84 + $60,266.91 / (1 + MIRR)^5 $60,266.91 / $33,484.84 = (1 + MIRR)^5 MIRR = ($60,266.91 / $33,484.84)^1/5 - 1 MIRR = .1247, or 12.47%
Siva, Inc., imposes a payback cutoff of three years for its international investment projects. 0 -$ 65,000 -$ 75,000 1 25,500 17,500 2 33,000 20,500 3 23,500 31,000 4 10,500 235,000 What is the payback period for both projects? Which project should the company accept?
2.28 25,500+33,000=58500 65000-58500=6500 6500/23500= 0.2766 3.03 17500+20500+31000=69000 75000-69000 6000/235000= .0255 Project A
An investment project provides cash inflows of $645 per year for eight years. What is the project payback period if the initial cost is $1,800? What is the project payback period if the initial cost is $3,500? What is the project payback period if the initial cost is $5,300?
2.79 645x2=1290 1800-1290=510 510/645 5.43 645x5=3225 3500-3225=275 275/645 0, won't ever pay back
What is the IRR of the following set of cash flows? 0 -$ 17,100 1 7,800 2 9,100 3 7,600
20.44 Use CF and CPT IRR
You're trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of $11.2 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of $1,774,300, $1,827,600, $1,796,000, and $1,249,500 over these four years, what is the project's average accounting return (AAR)?
29.68 Depr: 11200000/4=2800000 Avg NI: 1774300+1827600+1249500+1796000/4 Avg NI: 1661850 Avg BV: 11200000+0/2=5600000 1661850/5600000= .2968
A firm evaluates all of its projects by applying the NPV decision rule. A project under consideration has the following cash flows: 0 -$ 28,400 1 12,400 2 15,400 3 11,400 What is the NPV for the project if the required return is 12 percent? At a required return of 12 percent, should the firm accept this project? What is the NPV for the project if the required return is 24 percent? At a required return of 24 percent, should the firm accept this project?
3,062.51, Yes Use Calc CF NPV and CPT at 12% and 24% -2405.24 No
What is the payback period for the following set of cash flows? 0 -$ 4,500 1 1,050 2 1,250 3 2,150 4 1,150
3.04 Add the years until you reach close to 4500 1050+1250+2150=4450 4500-4450=50 50/1150=0.0435 3+.04
Consider the following two mutually exclusive projects: 0 -$ 355,000 -$ 47,500 1 40,000 23,500 2 60,000 21,500 3 60,000 19,000 4 435,000 14,100 Whichever project you choose, if any, you require a 15 percent return on your investment. What is the payback period for each project? If you apply the payback criterion, which investment will you choose? What is the discounted payback period for each project? If you apply the discounted payback criterion, which investment will you choose? What is the NPV for each project? If you apply the NPV criterion, which investment will you choose? What is the IRR for each project? If you apply the IRR criterion, which investment will you choose? What is the profitability index for each project? If you apply the profitability index criterion, which investment will you choose? Based on your answers in (a) through (e), which project will you finally choose?
3.45 and 2.13 Project B 40000+60000+60000=160000 355000-160000= 195000/435000= .448+3 23500+21500=45000 47500-4500=2500/19000 .1316+2 3.95 and 2.87 Project B 40000/1.15= 34782.609 60000/1.15^2=45368.62 60000/1.15^3=39450.974 435000/1.15^4= 248712.662 Add 3 year totals. Take initial-ans/year 4 Repeat project B 13,314.86 and 9,746.40 Project A Use Calc CF 16.27 and 25.72 Project B Use Calc CF 1.04 and 1.21 Project B Use Calc....Initial is 0 and NPV/Initial Project A because larger NPV
An investment project costs $10,000 and has annual cash flows of $2,810 for six years. What is the discounted payback period if the discount rate is zero percent? What is the discounted payback period if the discount rate is 4 percent? What is the discounted payback period if the discount rate is 20 percent?
3.56 2810x3= 8430 10000-8430= 1570 1570/2810=.5587 + 3 3.92 2810/1.04= 2701.923 2810/1.04^2 = 2598.00 2810/1.04^3 = 2498.0798 2810/1.04^4 = 2401.9998 10000-2701.923-2598-2498.08= 2201.997/2401.999 3+ans 0, never pays back N= 6 I/Y= 20 FV=0 PMT=2810 CPT PV=8344.68
A project that provides annual cash flows of $16,700 for ten years costs $73,000 today. What is the NPV for the project if the required return is 9 percent? At a required return of 9 percent, should the firm accept this project? What is the NPV for the project if the required return is 21 percent? At a required return of 21 percent, should the firm accept this project? At what discount rate would you be indifferent between accepting the project and rejecting it?
34,174.88, yes CF0= -73000 CF1=16700 F1= 10 -----CPT NPV -5296.90, reject 18.79 CPT IRR
An investment has an installed cost of $517,800. The cash flows over the four-year life of the investment are projected to be $231,850, $248,450, $215,110, and $163,820. If the discount rate is zero, what is the NPV? If the discount rate is infinite, what is the NPV? At what discount rate is the NPV just equal to zero?
341,430.00 -517,800 (maxed installe cost only negative) 25.45 Use calc
A project has the following cash flows: 0 -$ 15,600 1 6,300 2 7,600 3 6,100 What is the NPV at a discount rate of zero percent? What is the NPV at a discount rate of 9 percent? What is the NPV at a discount rate of 17 percent? What is the NPV at a discount rate of 30 percent?
4,400 1,286.90 -854.82 -3,480.29 Use CF and CPT NPV
Light Sweet Petroleum, Inc., is trying to evaluate a generation project with the following cash flows 0 -$ 39,200,000 1 63,200,000 2 - 12,200,000 What is the NPV for the project if the company requires a return of 11 percent? Should the firm accept this project? This project has two IRR's, namely ----percent and ---- percent, in order from smallest to largest. (Note: If you can only compute one IRR value, you should input that amount into both answer boxes in order to obtain some credit.)
7835143.25, yes Use CF 38.80 ??? CPT IRR equation for the IRR of the project is: 0 = -$39,200,000 + $63,200,000 / (1 + IRR) - $12,200,000 / (1 + IRR)2
An investment project has annual cash inflows of $3,400, $4,300, $5,500, and $4,700, for the next four years, respectively. The discount rate is 13 percent. What is the discounted payback period for these cash flows if the initial cost is $6,100? What is the discounted payback period for these cash flows if the initial cost is $8,200? What is the discounted payback period for these cash flows if the initial cost is $11,200?
Find PV of Amounts 3400/1.13= 3008.8496 4300/1.13^2= 3367.5307 5500/1.13^3= 3811.7759 4700/1.13^4= 2882.5980 (6100-3008.8496)/3367.5307= .9179+1 = 1.92 (8200-3008.85-3367.53)/3811.76= .478+2= 2.478 (11200-3008.85-3367.53-3811.78)/2882.598= .351+3