Green Inc. is considering Projects S and L. However company has lost investment information for Project L. Paybackperiod for both projects are the same. The cash flows for both the projects are shown below What is the IRR of theproject with higher NPV?WACCCFSCFL13.65%14.0%15.16%8.0%9.95%11.52%01$1,710 $520 $570 $620-SX.$670 $620 $570$670$520 A project requires certain investment X today. It's profitability index is 1.20. The project is evaluated based on thefirm's 15% cost of capital. Year 1 this project will generate cash inflow of $50,000. This cash flow will increase by$25,000 each year for years 2 through 5. In other words, starting year 1, the cash flow will be $50,000 and this willincrease by additional $25,000 for years 2 through 5. What is the project's Internal rate of return, the IRR20.01%21.76 %16.29%15.47%

Payback period is the period required to recover initial cash flow of the project and is one simple…

Answered: dering Projects ver company has lost…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 1P

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Jasmine Manufacturing is considering a project that will require an initial investment of $52,000 and is expected to generate future cash flows of $10,000 for years 1 through 3, $8,000 for years 4 and 5, and $2,000 for years 6 through 10. What is the payback period for this project?
Buena Vision Clinic is considering an investment that requires an outlay of 600,000 and promises a net cash inflow one year from now of 810,000. Assume the cost of capital is 10 percent. Required: 1. Break the 810,000 future cash inflow into three components: a. The return of the original investment b. The cost of capital c. The profit earned on the investment 2. Now, compute the present value of the profit earned on the investment. 3. Compute the NPV of the investment. Compare this with the present value of the profit computed in Requirement 2. What does this tell you about the meaning of NPV?
Redbird Company is considering a project with an initial investment of $265,000 in new equipment that will yield annual net cash flows of $45,800 each year over its seven-year life. The companys minimum required rate of return is 8%. What is the internal rate of return? Should Redbird accept the project based on IRR?
Fenton, Inc., has established a new strategic plan that calls for new capital investment. The company has a 9.8% required rate of return and an 8.3% cost of capital. Fenton currently has a return of 10% on its other investments. The proposed new investments have equal annual cash inflows expected. Management used a screening procedure of calculating a payback period for potential investments and annual cash flows, and the IRR for the 7 possible investments are displayed in image. Each investment has a 6-year expected useful life and no salvage value. A. Identify which project(s) is/are unacceptable and briefly state the conceptual justification as to why each of your choices is unacceptable. B. Assume Fenton has $330,000 available to spend. Which remaining projects should Fenton invest in and in what order? C. If Fenton was not limited to a spending amount, should they invest in all of the projects given the company is evaluated using return on investment?
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Project S has a cost of $10,000 and is expected to produce benefits (cash flows) of $3,000 per year for 5 years. Project L costs $25,000 and is expected to produce cash flows of $7,400 per year for 5 years. Calculate the two projects’ NPVs, IRRs, MIRRs, and PIs, assuming a cost of capital of 12%. Which project would be selected, assuming they are mutually exclusive, using each ranking method? Which should actually be selected?
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Tropical Sweets is considering a project that will cost $70 million and will generate expected cash flows of $30 million per year for 3 years. The cost of capital for this type of project is 10%, and the risk-free rate is 6%. After discussions with the marketing department, you learn that there is a 30% chance of high demand with associated future cash flows of $45 million per year. There is also a 40% chance of average demand with cash flows of $30 million per year as well as a 30% chance of low demand with cash flows of only $15 million per year. What is the expected NPV?
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A project is projected to cost $2,000,000 to undertake. It will generate positive cash inflows as follows: Year 1 - $400,000; Year 2 500,000; Year 3 - $650,000; ear 4 - 750,000; Year 5 - 800,000. What is the project's Profitability Index if the required return is 10% ?

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dering Projects ver company has lost investment information for Project period for both projects are the same. The cash flows for both the projects are shown below What is the IRR project with higher NPV? WACC 8.0% CFS CFL 13.65% 14.0% 0 $1,710 $520 $570 $620 5670 -SX. 3670 $620 $570 $520