Question 4 (9 marks) ABC Inc. is considering investing in the following capital project that is expected to provide 10 years of cash flows (= sales revenue net of operating costs). The expected year-end cash flows are as follows: Project A: $0 (Years 1-2) and $250.000 (Years 3 - 10) The required rate of return for the project is 10% per year. Suppose Project A's initial expenditure is $1,000,000. (a) (b) (c) Use the net present value (NPV) method to determine whether the project should be taken. (4 marks) If ABC uses other decision rules such as IRR, would it arrive at the same decision as NPV? Explain. (2 marks) Put down the numeric formula (NO calculation of the final answer is required) for Project A's internal rate of return (IRR) and state the condition under which Project A will be REJECTED. (3 marks)
Question 4 (9 marks) ABC Inc. is considering investing in the following capital project that is expected to provide 10 years of cash flows (= sales revenue net of operating costs). The expected year-end cash flows are as follows: Project A: $0 (Years 1-2) and $250.000 (Years 3 - 10) The required rate of return for the project is 10% per year. Suppose Project A's initial expenditure is $1,000,000. (a) (b) (c) Use the net present value (NPV) method to determine whether the project should be taken. (4 marks) If ABC uses other decision rules such as IRR, would it arrive at the same decision as NPV? Explain. (2 marks) Put down the numeric formula (NO calculation of the final answer is required) for Project A's internal rate of return (IRR) and state the condition under which Project A will be REJECTED. (3 marks)
Financial And Managerial Accounting
15th Edition
ISBN:9781337902663
Author:WARREN, Carl S.
Publisher:WARREN, Carl S.
Chapter26: Capital Investment Analysis
Section: Chapter Questions
Problem 3CMA
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Transcribed Image Text:Question 4 (9 marks)
ABC Inc. is considering investing in the following capital project that is expected to provide 10
years of cash flows (= sales revenue net of operating costs). The expected year-end cash flows
are as follows:
Project A: $0 (Years 1-2) and $250.000 (Years 3 - 10)
The required rate of return for the project is 10% per year. Suppose Project A's initial expenditure
is $1,000,000.
(a)
(b)
(c)
Use the net present value (NPV) method to determine whether the project should be taken.
(4 marks)
If ABC uses other decision rules such as IRR, would it arrive at the same decision as NPV?
Explain.
(2 marks)
Put down the numeric formula (NO calculation of the final answer is required) for Project
A's internal rate of return (IRR) and state the condition under which Project A will be
REJECTED.
(3 marks)
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