Answered: The required rate of return on these…

The required rate of return on these projects is 11%. They are of equal risk. What is each project’s payback period? What is each project’s NPV? What is each project’s IRR?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 7P

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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

A company is considering mutually exclusive projects. The free cash flows associated with these projects are as follows:

Project A Project B

Initial outlay -$100,000 -$100,000

Year 1 $32,000 $0

Year 2 $32,000 $0

Year 3 $32,000 $0

Year 4 $32,000 $0

Year 5 $32,000 $200,000

The required rate of return on these projects is 11%. They are of equal risk.

What is each project’s payback period?
What is each project’s NPV?
What is each project’s IRR?
What is each project’s MIRR?
Which project should be chosen?
Is it possible for conflicts to exist between NPV and IRR when independent projects are being evaluated? Explain your answer

Definition Definition Cash that is left over after a company has paid for its operating and capital expenses. Unlike net income or earnings, free cash flow excludes non-cash expenses of the income statement and includes the expenditures on equipment and assets. Free cash flow also helps potential shareholders to evaluate how quickly the company can pay interest and dividends.

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