Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
expand_more
expand_more
format_list_bulleted
Related questions
Concept explainers
Question
![## Project Evaluation and NPV Calculation
### Project Overview
Consider the following two projects, each with designated cash flows over a five-year period and an associated discount rate. The cash flows are documented in the table below:
**Project Cash Flows and Discount Rates:**
| Project | Year 0 Cash Flow | Year 1 Cash Flow | Year 2 Cash Flow | Year 3 Cash Flow | Year 4 Cash Flow | Discount Rate |
|---------|------------------|------------------|------------------|------------------|------------------|----------------|
| A | -100 | 40 | 50 | 60 | N/A | 0.13 |
| B | -73 | 30 | 30 | 30 | 30 | 0.13 |
**Key Concepts:**
- **Cash Flow (CF)**: Represents the net amount of cash being transferred in and out of the project at different years.
- **Discount Rate**: The rate used to calculate the present value of future cash flows.
### Net Present Value (NPV)
The net present value of a project evaluates the profitability by accounting for the time value of money. It calculates the present values (PV) of incoming and outgoing cash flows using the formula:
\[ PV = \frac{CF_t}{(1 + r)^t} \]
Where:
- \( CF_t \) is the cash flow at time t.
- \( t \) is the time period.
- \( r \) is the discount rate.
The NPV is the sum of all these present values.
### Calculation and Options
Given the cash flows for Project B:
- **Year 0**: -73
- **Year 1**: 30
- **Year 2**: 30
- **Year 3**: 30
- **Year 4**: 30
And a discount rate of 0.13, we compute the NPV as follows:
\[ NPV = -73 + \frac{30}{(1+0.13)^1} + \frac{30}{(1+0.13)^2} + \frac{30}{(1+0.13)^3} + \frac{30}{(1+0.13)^4} \]
The NPV calculation yields:
- \(\frac{30}{(1.13)^1}](https://content.bartleby.com/qna-images/question/6b2d2087-0413-432e-842b-e7bfa6e336f7/03642fb7-9fda-4b96-aab9-4eaad9b0f330/9ydlwqi_processed.png)
Transcribed Image Text:## Project Evaluation and NPV Calculation
### Project Overview
Consider the following two projects, each with designated cash flows over a five-year period and an associated discount rate. The cash flows are documented in the table below:
**Project Cash Flows and Discount Rates:**
| Project | Year 0 Cash Flow | Year 1 Cash Flow | Year 2 Cash Flow | Year 3 Cash Flow | Year 4 Cash Flow | Discount Rate |
|---------|------------------|------------------|------------------|------------------|------------------|----------------|
| A | -100 | 40 | 50 | 60 | N/A | 0.13 |
| B | -73 | 30 | 30 | 30 | 30 | 0.13 |
**Key Concepts:**
- **Cash Flow (CF)**: Represents the net amount of cash being transferred in and out of the project at different years.
- **Discount Rate**: The rate used to calculate the present value of future cash flows.
### Net Present Value (NPV)
The net present value of a project evaluates the profitability by accounting for the time value of money. It calculates the present values (PV) of incoming and outgoing cash flows using the formula:
\[ PV = \frac{CF_t}{(1 + r)^t} \]
Where:
- \( CF_t \) is the cash flow at time t.
- \( t \) is the time period.
- \( r \) is the discount rate.
The NPV is the sum of all these present values.
### Calculation and Options
Given the cash flows for Project B:
- **Year 0**: -73
- **Year 1**: 30
- **Year 2**: 30
- **Year 3**: 30
- **Year 4**: 30
And a discount rate of 0.13, we compute the NPV as follows:
\[ NPV = -73 + \frac{30}{(1+0.13)^1} + \frac{30}{(1+0.13)^2} + \frac{30}{(1+0.13)^3} + \frac{30}{(1+0.13)^4} \]
The NPV calculation yields:
- \(\frac{30}{(1.13)^1}
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution
Trending nowThis is a popular solution!
Step by stepSolved in 2 steps with 3 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Consider 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_forward5. LL Consider the following cash flows of a project: Year Year 1. 50 0. 2. 3. 4. 1. Find the internal rate of return for this investment. 0. 20. Multiple Choice < Prev 10 of 15 Next here to search F11 F12 F4 F5 69 81 9F-arrow_forward1. What is the project’s net present value? 2. What is the project’s internal rate of return to the nearest whole percent? 3. What is the project’s simple rate of return?arrow_forward
- a) b) Consider the following two projects: Project A B Year 0 Cash Flow -100 -73 17.3% C. d. Year 1 Cash Flow 40 30 a. 30 percent. b. 20 percent. 0 percent. 10 percent. Year 2 Cash Flow What is the incremental IRR of Project B over Project A? a. 12.6% b. 23.3% C. 1.7% d. 50 30 Year 3 Cash Flow 60 30 Year 4 Cash Flow N/A 30 Discount Rate If the standard deviation of returns on the market is 20 percent, and the beta of a well- diversified portfolio is 1.5, calculate the standard deviation of this portfolio. .15 .15arrow_forwardBaghibenarrow_forwardplease ASAP, direct thumps up :)arrow_forward
- Need all questionsarrow_forwardThe following are the cash flows of 2 projects Year 0, Project A $340, Project B $340 Year 1, Project A $170, Project B $240 Year 2, Project A $170, Project B $240 Year 3, Project A $170, Project B $240 Year 4, Project A $170, Project B Calculate the NPV for both projects if the discount rate is 10% Project A - NPV? Project B - NPV? Suppose that you have can choose only one of these projects. Which would you choose? Project A, B, or niether?arrow_forwardCompute the NPV for Project X and accept or reject the project with the cash flows shown below if the appropriate cost of capital is 9 percent. Time: 0 1 2 3 4 5 Cash flow: -80 -80 0 110 85 60 Multiple Choice A. $30.76 B. $184.15 C. $66.78 D. $28.22arrow_forward
- Problem 7: NPV versus IRR. Consider the following two mutually exclusive projects: Year Cash flow Cash flow (X) (Y) O 1 2 3 -9500 5800 4000 4000 PART 7A: The NPV for X is $ Answer: 2083.77 -9500 3500 5000 6000 if the required rate of return is 10%.arrow_forwardConsider the following two mutually exclusive investment projects:Project Cash Flowsn A B 0 -$4,000 -$8,5001 $400 $11,5002 $7,000 $400Assume that the MARR = 15%.(a) Using the NPW criterion, which project would you select?(b) On the same chart, sketch the PW(i) function for each alternative fori = 0% and 50%. For what range of i would you prefer Project B?arrow_forwardCalculating IRR Compute the internal rate of return for the cash flows of the following two projects: Year Project A Project B 0 -$7,300 -$4,390 1 3, 940 2,170 2 3,450 2,210 3 2,480 1,730arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- 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
Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:9780134897264
Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...
Finance
ISBN:9780077861759
Author: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 Professor
Publisher:McGraw-Hill Education