8.4.2
You are trying to decide between three mutually exclusive investment opportunities. The most appropriate tool for identifying the correct decision is ________. net present value (NPV) profitability index internal rate of return (IRR) incremental internal rate of return (IRR)
A
Assume that projects A and B are mutually exclusive. The correct investment decision and the best rationale for that decision is to ________. invest in project A, since NPVB < NPVA invest in project B, since IRRB > IRRA invest in project B, since NPVB > NPVA invest in project A, since NPVA > 0
A) NPVA = -100 + 40 / (1 + 0.11)1 + 50 / (1 + 0.11)2 + 60 / (1 + 0.11)3 = $20.49; NPVB = -73 + 30 / (1 + 0.11)1 + 30 / (1 + 0.11)2 + 30 / (1 + 0.11)3 + 30 / (1 + 0.11)4 = $20.07 invest in project A, since NPVB < NPVA
A company has identified the following investments as looking promising. Each requires an initial investment of $1.2 million. Which is the best investment? a perpetuity that generates a cash flow at the end of year 1 of $100,000, has a growth rate of 1.25%, and a cost of capital of 11.0% a perpetuity that generates a cash flow at the end of year 1 of $800,000, has a growth rate of 2.25%, and a cost of capital of 11.8% an investment that generates a cash flow of $400,000 at the end of each of the next five years, when the cost of capital is 6.1% an investment that generates a cash flow of $200,000 at the end of each of the next ten years, when the cost of capital is 6.1%
B) NPV (B) = -1.2 + 0.8 / (0.118 - 0.0225) = $7.177 million NPV a perpetuity that generates a cash flow at the end of year 1 of $800,000, has a growth rate of 2.25%, and a cost of capital of 11.8%
An investor is considering the two investments shown above. Her cost of capital is 8%. Which of the following statements about these investments is true? Time: not years. The investor should take investment A since it has a greater net present value (NPV). The investor should take investment A since it has a greater internal rate of return (IRR). The investor should take investment B since it has a greater net present value (NPV). The investor should take investment B since it has a greater internal rate of return (IRR).
C) Using a financial calculator, NPV(A) = $17,629 ;NPV(B) = $44,048 ;comparison of NPV is used to decide between mutually exclusive projects. The investor should take investment B since it has a greater net present value (NPV).
Assume that projects Alpha and Beta are mutually exclusive. The correct investment decision and the best rationale for that decision is to ________. invest in project Beta, since NPVBeta > 0 invest in project Alpha, since NPVBeta < NPVAlpha invest in project Beta, since IRRB > IRRA invest in project Beta, since NPVBeta > NPVAlpha > 0
D) NPV Alpha NPV = -$79 + $20 / (1 + 0.16)1 + $25 / (1 + 0.16)2 + $30 / (1 + 0.16)3 + $35 / (1 + 0.16)4 + $40 / (1 + 0.16)5 = 14.41 NPV BetaNPV = -$80 + 25 / (1 + 0.15)1 + $25 / (1 + 0.15)2 + $25 / (1 + 0.15)3+ $25 / (1 +0.15)4 + $25 / (1 + 0.15)5 + $50 / (1 + 0.15)6 + $25 / (1 + 0.15)7= 24.01 invest in project Beta, since NPVBeta > NPVAlpha > 0
13) An investor is considering the two investments shown above. Which of the following statements about these investments is true? Time: Year 0 1 2 3 4 The investor should take investment A since it has a greater net present value (NPV). The investor should take investment A since it has a greater internal rate of return (IRR). The investor should take investment B since it has a greater net present value (NPV). Neither investment should be taken since they both have a negative net present value (NPV).
D) Using a financial calculator, NPV(A) = -$0.01906 million, IRR(A) = 7.56%, NPV(B) = -$0.014567, IRR(B) = 6.46%;Comparison of NPV is used to decide between mutually exclusive projects. Neither investment should be taken since they both have a negative net present value (NPV).
