An investment of $80,000 is projected to generate escalated dollar net revenues (income minus costs) of $10,000 in year 1, $30,000 in year 2, and $40,000 in year 3 with a $40,000 salvage value at the end of year 3. (a) Calculate the escalated dollar 1 RR for an escalated dollar MARR of 20%. Is this an acceptable investment? (b) Calculate the equivalent constant dollar TRR assuming that inflation will be 8% in year 1, 10% in year 2, and 12% in year 3. Is this an acceptable investment?

An investment of $80,000 is projected to generate escalated dollar net revenues (income minus costs) of $10,000 in year 1, $30,000 in year 2, and $40,000 in year 3 with a $40,000 salvage value at the end of year 3. (a) Calculate the escalated dollar 1 RR for an escalated dollar MARR of 20%. Is this an acceptable investment? (b) Calculate the equivalent constant dollar TRR assuming that inflation will be 8% in year 1, 10% in year 2, and 12% in year 3. Is this an acceptable investment?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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2. Investment Criteria. Consider the following information. Expected Net Cash Flows YearProject X 0($10,000) 16,500 23,500 33,000 41,000 Assume the discount rate is 10 percent. a. Calculate Project X’s discounted payback period. Should the project be accepted? b. Calculate the profitability index. Should the project be accepted? c. Calculate the accounting rate of return. Should the project be accepted?
6.20 The cash flows for two investment projects are as given in Table P6.20. (a) For project A, find the value of X that makes the equivalent annual receipts equal the equivalent annual disbursement at i = (b) For A to be preferred over project B, determine the minimum acceptable value of X in year 2 at i 15%. 12% based on an AE criterion. TABLE P6.20 Project's Cash Flow B 01 -$4,500 $6,500 $1,000 -$1,400 2 -$1,400 3 $1,000 -$1,400 $1,000 -%$1,400
4. Capital expenditure of a new investment project is $ 120,000,000; the expected annual net cash flows generated from the investment are given below. Suppose that the company's cost of capital is 10%, calculate and comment on the accounting rate of return, internal rate of return, and discounted payback period of the project. Years Cash flows($000) DF (10%) 1 40,000 0.909 2 42,000 0.826 3 50,000 0.751 4 52,000 0.683 5 55,000 0.621 SV 60,000 0.565
A project requires a $38.000 initial investment and is expected to generate end-of period annual cash inflows as follows: Year 1 Year 2 Year 3 $17,000 $ 18,000 17,000 Assuming a discount rate of 11%, what is the net present value (rounded to the nearest whole dollar) of this investment? Solected present value factors for a single sum are shown in the table below. i- 118 1- 116 1- 11 n 2 n 3 0.9009 0.8116 0.7312 Multiple Choice $4,355 S(10.752)
A project has the following cash flows: Year Cash Flow 0 $71,500 1 -51,000 28,800 2 a. What is the IRR for this project? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the NPV of this project if the required return is 5 percent? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. What is the NPV of the project if the required return is O percent? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) d. What is the NPV of the project if the required return is 23 percent? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) a. Internal rate of return b. NPV C. NPV d. NPV %
Consider a project with the following cash flows: Year Cash Flow - 12000 1 3000 2 3000 3 3000 4 3000 If the appropriate discount rate for this project is 14%, then the net present value (NPV) is closest to: ..... O A. - $1,955 B. - $2,281 O C. $24,000 D. - $3,259
Consider the following cash flows:Year Cash Flow0 -$8,0001 $3,0002 $3,6003 $2,7004 $2,5005 $2,1006 $1,600 1. NPV. Using a 10% required rate of return, calculate the NPV for this project. Should it be accepted or rejected? 2. PI. Calculate the Profitability Index (PI) for this project. Should it be accepted or rejected?
A project has the following cash flows: Year Cash Flows 0 $ 128,200 12 1 2 3 4 49,400 63,800 51,600 28,100 The required return is 8.7 percent. What is the profitability index for this project? Multiple Choice 1.142 1.003 .803 1.038
more. 3. Net present value method Aa Aa Consider the case of Underwood Manufacturing: Underwood Manufacturing is evaluating a proposed capital budgeting project that will require an initial investment of $120,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $37,600 Year 2 $50,500 Year 3 $45,000 Year 4 $41,900 Assume the desired rate of return on a project of this type is 10%. What is the net present value of this project? -$4,415.10 $18,344.79 -$7,244.50 $23,914.50 Suppose Underwood Manufacturing has enough capital to fund the project, and the project is not competing for funding with other projects. Should Underwood Manufacturing accept or reject this project? Accept the project Reject the project
A project will generate the following cash flows. The required rate of return is 15%. If the profitability index is 1.7, what is the initial investment for this project? Year Cash flow 1 $15,000 2 $16,000 3 $17,000 4 $18,000 5 $19,000 Select one: a. $26,217.06 b. $31,460.47 c. $32,974.98 d. $37,752.57 e. $95,297.70
1. What is the net present value of a project with the following cash flows if the requiredrate of return is 12 percent? Year Cashflow 0 -$42,398 1 $13,407 2 $21,219 3 $17,800
Consider the following two mutually exclusive projects: Year Cash Flow Cash Flow B 0 -$318,844 -$27,476 1 27,700 9,057 2 56,000 10,536 3 55,000 11,849 4 399,000 13,814 The required return is 15 percent for both projects. Which one of the following statements related to these projects is correct? A. Because both the IRR and the PI imply accepting Project B, that project should be accepted.B. The profitability rule implies accepting Project A.C. The IRR decision rule should be used as the basis for selecting the project in this situation.D. Only NPV implies accepting Project A.E. NPV, IRR, and PI all imply accepting Project A.

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