CH 9 HW

Consider the following three-year project. The initial after-tax outlay or after-tax cost is $1,500,000. The future after-tax cash inflows for years 1, 2, 3 and 4 are: $800,000, $800,000, $300,000 and $100,000, respectively. What is the payback period without discounting cash flows?

1.875 years

Consider the following ten-year project. The initial after-tax outlay or after-tax cost is $1,500,000. The future after-tax cash inflows each year for years 1 through 10 are $400,000 per year. What is the payback period without discounting cash flows?

3.75 years 1,500,000/400,000 = 3.75

B&H, Inc. is currently considering an five-year project that has an initial outlay or cost of $220,000. The future cash inflows from its project for years 1 through 5 are the same at $50,000. B&H has a discount rate of 8%. Because of capital rationing (shortage of funds for financing), B&H wants to compute the profitability index (PI) for each project. What is the PI for B&H's current project?

About 0.91 PI = NPV - costs/costs

InnerC, Inc. is currently considering an five-year project that has an initial outlay or cost of $60,000. The future cash inflows from its project for years 1 through 5 are the same at $20,000. InnerC has a discount rate of 15%. Because of concerns about funds being short to finance all good projects, InnerC wants to compute the profitability index (PI) for each project. What is the PI for InnerC's current project?

About 1.12 first find NPV = -60,000 + 20,000/(1+.15) + 20,000/(1+.15)^2 + 20,000/(1+.15)^3 + 20,000/(1+.15)^4 + 20,000/(1+/15)^5 = 7,043.11 PI = NPV + costs/costs 7,043.11 + 60,000/60,000 = 1.12

Nodak, Inc. is currently considering an eight-year project that has an initial outlay or cost of $160,000. The cash inflows from its project for years 1 through 5 are the same at $55,000. Nodak has a discount rate of 11%. Because there is a shortage of funds to finance all good projects, Nodak wants to compute the profitability index (PI) for each project. That way Nodak can get an idea as to which project might be a better choice. What is the PI for Nodak's current project?

About 1.27 first, find NPV = -160,000 + 55,000/(1+.11) + 55,000/(1+.11)^2 + 55,000/(1+.11)^3 + 55,000/(1+.11)^4 + 55,000/(1+.11)^5 = 43,274.34 PI = NPV + costs/costs = 43,274.34 + 160,000/160,000 = 1.27

To be considered acceptable, a project must have an NPV greater than 1.0.

False

Geronimo, Inc. is considering a project that has an initial after-tax outlay or after-tax cost of $220,000. The respective future cash inflows from its four-year project for years 1 through 4 are: $50,000, $60,000, $70,000 and $80,000. Geronimo uses the net present value method and has a discount rate of 11%. Will Geronimo accept the project?

Geronimo rejects the project because the NPV is about -$22,375.73. NPV = -220,000 + 50,000/(1+.11) + 60,000/(1+.11)^2 + 70,000/(1+.11)^3 + 80,000/(1+.11)^4 = -22,375.73

Heartland, Inc. is considering an eight-year project that has an initial after-tax outlay or after-tax cost of $180,000. The future after-tax cash inflows from its project for years 1 through 8 are the same at $38,000. Heartland uses the net present value method and has a discount rate of 11.50%. Will Heartland accept the project?

Heartland accepts the project because the NPV is about $12,114. NPV = CF0 + (PMT x 1 - 1/(1+r)^n/r) = -180,000 + (38,000 x 1 -1/(1+.115)^8/.115) = 12,114

A project provides cash inflows of $2,822 each year for four years. What is the payback period if the cost is $12,500?

None of the above

Which method is designed to give the dollar amount of return for every $1.00 invested in the project in terms of current dollars?

Profitability Index Method

Sandstone, Inc. is considering a four-year project that has an initial after-tax outlay or after-tax cost of $80,000. The future cash inflows from its project are $40,000, $40,000, $30,000 and $30,000 for years 1, 2, 3 and 4, respectively. Sandstone uses the net present value method and has a discount rate of 12%. Will Sandstone accept the project?

Sandstone accepts the project because it has a positive NPV of over $28,000 NPV = -80,000 + 40.000/(1+.12) + 40,000/(1+.12)^2 + 30,000/(1+.12)^3 +30,000/(1+.12)^4 = 28,020.99

Which of the statements below describes the IRR decision criterion?

The decision criterion is to accept a project if the IRR exceeds the hurdle rate or required return rate

Which of the statements below is FALSE?

The profitability index (PI) method multiplies the Present Value of Benefits by Present Value of Costs.

The IRR decision criterion is to accept a project if the IRR exceeds the desired or required return rate and to reject the project if the IRR is less than the desired or required rate of return.

True

Project A has an NPV of $20,000 and a PI of 1.2. Project B has an NPV of $10,000 and a PI of 1.3. The two projects are independent of one another and both projects have equal lives. We have enough capital to fund project A, project B, or both projects. Which of the following statements is true?

We should accept both Project A and Project B,

Project A has an NPV of $20,000 and a PI of 1.2. Project B has an NPV of $10,000 and a PI of 1.3. Both projects have equal lives. What should the best decision if we are NOT concerned with capital rationing (that is, we are NOT concerned with being short of funds)?

We should accept both projects

Webster, Inc. is considering an eight-year project that has an initial after-tax outlay or after-tax cost of $180,000. The future after-tax cash inflows from its project for years 1 through 8 are the same at $35,000. Webster uses the net present value method and has a discount rate of 12%. Will Webster accept the project?

Webster rejects the project because the NPV is about -$6,133 NPV = -180,000 + (35,000 x 1-1/(1+.12)^8/.12) = -6,133

________ is at the heart of corporate finance, because it is concerned with making the best choices about project selection.

capital budgeting

The ________ model is usually considered the best of the capital budgeting decision-making models.

net present value (NPV)

The ________ method is simple and fast but economically unsound as it ignores all cash flow after the cutoff date and ignores the time-value of money.

payback period

The ________ method of capital budgeting is a ratio of the present value of cash inflows divided by the initial investment.

profitability index

The net present value of an investment is ________.

the present value of all benefits (cash inflows) minus the present value of all costs (cash outflows) of the project

The IRR is the discount rate that produces a zero NPV or the specific discount rate at which the present value of the cost equals ________.

the present value of the future benefits or cash inflows

The NPV profile of a project is ________.

the project's NPVs at different discount rates.

The initial outlay or cost is $1,000,000 for a four-year project. The respective future cash inflows for years 1, 2, 3 and 4 are: $500,000, $300,000, $300,000 and $300,000. What is the payback period without discounting cash flows?

year 1: 1,000,000 - 500,000 = 500,000 year 2: 500,000 - 300,000 = 200,000 200,000/300,000 = .67 2 + .67 2.67 years