Related questions
Please answer the following questions using the information below:
- NPV. Using a 10% required
rate of return , calculate the NPV for this project. Should it be accepted or rejected? - PI. Calculate the Profitability Index (PI) for this project. Should it be accepted or rejected?
Consider the following cash flows:
Year 0 1 2 3 4 5 6
Cash Flow -$8,000 $3,000 $3,600 $2,700 $2,500 $2,100 $1,600
- Payback. The company requires all projects to payback within 3 years. Calculate the payback period. Should it be accepted or rejected?
- Discounted Payback. Calculate the discounted payback using a discount rate of 10%. Should it be accepted or rejected?
IRR . Calculate the IRR for this project. The company’s required rate of return is 10%. Should it be accepted or rejected?- NPV. Using a 10% required rate of return, calculate the NPV for this project. Should it be accepted or rejected?
- PI. Calculate the Profitability Index (PI) for this project. Should it be accepted or rejected?
Expert Answer
Since you have asked a question with multiple parts, we will solve the first 3 parts for you as per policy. Please ask remaining parts separately or resubmit the question and mention the remaining parts which need to be solved.
| Year | Cash Flow |
| 0 | -8000 |
| 1 | 3000 |
| 2 | 3600 |
| 3 | 2700 |
| 4 | 2500 |
| 5 | 2100 |
| 6 | 1600 |
Answer 1)
Payback period = Number of years preceding to which investment in recovered + ((Initial Investment − Sum of cash flows in year preceding to which investment in recovered) / Cash flow in which investment in recovered)Payback period = Number of years preceding to which investment in recovered + ((Initial Investment - Sum of cash flows in year preceding to which investment in recovered) / Cash flow in which investment in recovered)
Payback period = 2+ ((8000 − 6600) / 2700)Payback period = 2+ ((8000 - 6600) / 2700)
Payback period = 2+ (1400 / 2700)Payback period = 2+ (1400 / 2700)
Payback period = 2.52 yearsPayback period = 2.52 years
The project should be accepted since the payback period is lower than the cut off period of 3 years.
Answer 2)
| Year | Cash Flow | Discounted Cash Flow = Cash Flow / (1+Discount Rate)YearDiscounted Cash Flow = Cash Flow / (1+Discount Rate)Year | Working |
| 0 | -8000 | -8000.00 | (-)8,000/(1.10)^0 |
| 1 | 3000 | 2727.27 | 3,000/(1.10)^1 |
| 2 | 3600 | 2975.21 | 3,600/(1.10)^2 |
| 3 | 2700 | 2028.55 | 2,700/(1.10)^3 |
| 4 | 2500 | 1707.53 | 2,500/(1.10)^4 |
| 5 | 2100 | 1303.93 | 2,100/(1.10)^5 |
| 6 | 1600 | 903.16 | 1,600/(1.10)^6 |
Discounted Payback period = Number of years preceding to which investment in recovered + ((Initial Investment − Sum of discounted cash flows in year preceding to which investment in recovered) / Discounted Cash flow in which investment in recovered)Discounted Payback period = Number of years preceding to which investment in recovered + ((Initial Investment - Sum of discounted cash flows in year preceding to which investment in recovered) / Discounted Cash flow in which investment in recovered)
Discounted Payback period = 3 + ((8000 − 7731.03) / 1707.53)Discounted Payback period = 3 + ((8000 - 7731.03) / 1707.53)
Discounted Payback period = 3 + (268.97/ 1707.53)Discounted Payback period = 3 + (268.97/ 1707.53)
Discounted Payback period = 3.16 yearsDiscounted Payback period = 3.16 years
As per the discounted payback period analysis, we should reject the project since the cut off for the payback period is 3 years and the payments arrive in a later period in comparison to the cut off for discounted payback period.
Answer 3)
We calculate the IRR using IRR function in excel.
Type cash flows in a range of cells
Type =IRR and press tab key
Select range of cash flows and press ENTER
We get IRR = 26.31%
The project should be accepted since the IRR is greater than the discount rate of 10%.
Step by stepSolved in 2 steps with 2 images
- Suppose a project has the following cash flows. What is the NPV if the cost of the project is $105,000 and the required return is 9.75%? Year Cash Flow $28.000 32,000 3 36,000 4 39,000 O$6,000 O $20,678 $1,193 $27,335 O $30,000 Page 16 of 30arrow_forwardConsider the following projects: Year 0 Year 1 Year 2 Year 3 Year 4 Discount Rate Cash Flow A -100 30 20 40 B -73 25 20 20 C -27 10 9 9 13= 60 14.50% 45 15.00% 11 14.00% a. Find the NPV of the projects, will you accept/reject them? b. What is the IRR of the projects, will you accept/reject? c. If the firm had $250 to invest today, what project(s) should it pursue? d. If the firm only had $100 to invest today, what project(s) should it pursue?arrow_forwardConsider the following two projects: Cash flows Project A Project B C0�0 −$ 240 −$ 240 C1�1 100 123 C2�2 100 123 C3�3 100 123 C4�4 100 a. If the opportunity cost of capital is 8%, which of these two projects would you accept (A, B, or both)? b. Suppose that you can choose only one of these two projects. Which would you choose? The discount rate is still 8%. c. Which one would you choose if the cost of capital is 16%? d. What is the payback period of each project? e. Is the project with the shortest payback period also the one with the highest NPV? f. What are the internal rates of return on the two projects? g. Does the IRR rule in this case give the same answer as NPV? h. If the opportunity cost of capital is 8%, what is the profitability index for each project? i. Is the project with the highest profitability index also the one with the highest NPV? j. Which measure should you use to choose between the projects?arrow_forward
- Anderson Systems is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that if a project's projected NPV is negative, it should be rejected. WACC: 9%arrow_forwardWhat would the effect of the failure in the ratio measurement?arrow_forwardMolin Inc. is considering to a project that will have the following series of cash flow from assets (in $ million): Year Cash flow 0 -1,580.92 1 453 2 749 3 935 The required return for the project is 6%. Year Cash flow 0 -1,580.92 1 453 2 749 3 935 1. The required return for the project is 6%. 2. What is the project's profitability index? 3. What is the internal rate of return (IRR) for this project?arrow_forward
- Profitability index. Given the discount rate and the future cash flow of each project listed in the following table, . use the Pl to determine which projects the company should accept. What is the Pl of project A? i Data Table (Round to two decimal places.) (Click on the following icon o in order to copy its contents into a spreadsheet.) Cash Flow Project A -%241,900,000 $150,000 $350,000 Project B Year 0 $2,300,000 $1,150,000 $950 000 $750,000 $550,000 Year 1 Year 2 Year 3 $550,000 Year 4 $750,000 $950,000 4% Year 5 $350.000 Discount rate 18% Print Donearrow_forwardYour required return is 15%. Should you accept a project with the following cash flows? Year 0 1 2 3 Cash Flow −$85 $40 $40 $35 Group of answer choices No, because the IRR is 13.92%. No, because the IRR is 14.73%. Yes, because the IRR is 16.21%. Yes, because the IRR is 17.19%.arrow_forwardTalent Inc. is considering a project that has the following cash flow and WACC data.WACC: 7%Year 0 1 2 3Cash flows -$1,600 $500 $600 $700 (1) What is the project's NPV?(2) What is the project's IRR?(3) What is the project's Payback Period?(4) What is the project's Discounted Payback Period?arrow_forward
- Use the table for the question(s) below. Consider the following two projects: Year 0 Project Cash Flow A - 100 40 50 B - 73 30 30 The payback period for project A is closest to: OA. 2.0 years O B. 2.4 years C. 2.2 years O D. 2.5 years Year 1 Cash Flow Year 2 Cash Flow Year 3 Cash Flow 60 30 Year 4 Cash Flow N/A 30 Discount Rate .15 .15arrow_forwardBarry company is considering a project that has the following cash flow and WACC data. what is the projects NPV? Note that you should use the WACC as the discount ratearrow_forwardRedesign Inc. is considering a project that has the following cash flow data. What is the project's payback period and discounted payback period? Assume the cost of capital is 12%. Year 0 1 2 3 Cash flows -$500 $200 $200 $200arrow_forward
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education