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
Related questions
Question
Romanos Construction is analyzing its capital expenditure proposals for the purchase of equipment in the coming year. The capital budget is limited to $5,000,000 for the year. Laura Berenstein, staff analyst at
Romanos, is preparing an analysis of the three projects under consideration by Chester Romanos, the company's owner.
Data Table
|
|
A |
B |
C |
D |
|
1 |
|
Project A |
Project B |
Project C |
|
2 |
Projected |
|
|
|
|
3 |
Net initial investment |
$3,000,000 |
$2,100,000 |
$3,000,000 |
|
4 |
Projected |
|
|
|
|
5 |
Year 1 |
$1,200,000 |
$1,200,000 |
$1,700,000 |
|
6 |
Year 2 |
1,200,000 |
600,000 |
1,700,000 |
|
7 |
Year 3 |
1,200,000 |
500,000 |
200,000 |
|
8 |
Year 4 |
1,200,000 |
|
100,000 |
|
9 |
Required |
10% |
10% |
10% |
|
1. |
Because the company's cash is limited, Romanos thinks the payback method should be used to choose between the capital budgeting projects. |
|
|
a. |
What are the benefits and limitations of using the payback method to choose between projects? |
|
|
b. |
Calculate the payback period for each of the three projects. Ignore income taxes. Using the payback method, which projects should Romanos choose? |
|
|
2. |
Berenstein thinks that projects should be selected based on their NPVs. Assume all cash flows occur at the end of the year except for initial investment amounts. Calculate the NPV for each project. Ignore income taxes. |
|
|
3. |
Which projects, if any, would you recommend funding? Briefly explain why. |
Transcribed Image Text:Present Value of $1
Periods
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
22%
24%
26%
28%
30%
32%
40%
Periods
Period 1 0.080
0.062
0.943
0.926
0.909
0.893
0.877
0.862
0.847
0.833
0.820
0.806
0.794
0.781
0.769
0.758
0.714
Period 1
Period 2 0.961
0.025
0.890
0.857
0.826
0.797
0.769
0.743
0.718
0.694
0.672
0.650
0.630
0.610
0.592
0.574
0.510
Period 2
0.840
0.792
Period 3 0.942
0.889
0.794
0.751
0.712
0.675
0.641
0.609
0.579
0.551
0.524
0.500
0.477
0.455
0.435
0.364
Period 3
Period 4 0.924
0.855
0.735
0.683
0.636
0.592
0.552
0.516
0.482
0.451
0.423
0.397
0.373
0.350
0.329
0.260
Period 4
Period 5 0.908
0.822
0.747
0.681
0.621
0.567
0.519
0.476
0.437
0.402
0.370
0.341
0.315
0.201
0.260
0.250
0.188
Period 5
0.180
0.159 0.143
Period 6 0.888
0.790
0.705
0.630
0.584
0.507
0.456
0.410
0.370
0.335
0.303
0.275
0.250 0.227
0.207
0.133
Period 6
Period 7 0.871
0.760 0.665
0.583
0.513
0.452
0.400
0.354
0.314
0.279
0.249
0.222
0.198 0.178
0.005
Period 7
Period 8 0.853
0.731
0.627
0.540
0.487
0.404
0.351
0.305
0.266
0.233
0.204
0.179
0.157 0.139
0.123 0.108
0.068
Period 8
Period 9 0.837
0.703
0.500
0.263
0.194
0.004
0.592
0.558
0.424
0.361
0.308
0.225
0.167 0.144
0.125
0.108
0.082
0.048
Period 9
Period 10 0.820
0.676
0.463
0.386
0.322
0.270
0.227
0.191
0.110
0.000
0.082
0.162
0.135
0.137 0.112
0.137
0.085
0.073
0.035 Period 10
Period 11 0.804
0.182
0.112
0.092 0.076
0.650
0.527
0.429
0.350
0.287
0.237
0.195
0.188
0.094
0.079
0.062 0.052
0.050
0.006
0.058 0.047
0.025 Period 11
Period 12 0.788
0.625 0.497
0.397
0.319
0.257 0.208
0.043 0.036
0.018 Period 12
Period 13 0.773
0.601
0.469
0.368
0.290
0.229
0.182
0.145
0.116
0.093
0.075 0.061
0.040
0.033 0.027
0.013 Period 13
Period 14 0.758
0.577
0.442
0.340
0.263
0.205
0.180
0.125
0.009
0.078
0.062
0.049
0.039 0.032
0.025 0.021
0.009 Period 14
Period 15 0.743
0.555
0.417
0.315
0.239
0.183
0.140
0.020
0.016
0.108
0.003
0.084
0.065
0.051
0.040
0.031
0.025
0.006 Period 15
0.202
0.270
0.218
0.163
0.148
Period 16 0.728
0.534
0.304
0.123
0.071
0.054
0.042
0.032
0.015
0.025 0.019
0.020 0.015
0.012
0.005 Period 16
Period 17 0.714
0.513
0.371
0.198
0.108
0.080
0.080 0.045
0.034
0.026
0.012
0.009
0.003 Period 17
Period 18 0.700
0.494
0.350
0.250
0.180
0.130
0.095
0.069
0.051
0.021
0.007
0.038
0.031
0.028
0.016
0.012
0.009
0.002 Period 18
0.475
0.456
0.083
0.073
Period 19 0.686
0.331
0.232
0.184
0.116
0.000
0.043
0.023
0.017
0.012
0.009
0.007
0.005
0.002 Period 19
Period 20 0.673
0.312
0.215
0.149
0.104
0.051
0.037 0.028
0.019
0.014
0.010
0.007
0.005
0.004
0.001 Period 20
Period 21 0.660
0.439
0.294
0.199
0.135
0.093
0.084
0.044
0.031 0.022
0.015
0.011
0.008
0.008
0.004
0.003
0.001 Period 21
Period 22 0.647
0.422
0.278
0.184
0.123
0.083 0.056
0.038
0.026 0.018
0.013
0.009
0.006
0.004
0.003
0.002
0.001 Period 22
0.262
0.170
0.112
0.033
0.010
0.008
Period 23 0.634
0.406
0.074
0.049
0.022
0.002
0.015
0.013
0.007
0.005
0.003
0.002
0.000 Period 23
Period 24 0.622
0.390
0.247
0.158
0.102
0.068
0.043
0.028
0.019
0.006
0.004
0.003
0.002 0.001
0.000 Period 24
Period 25 0.610
0.375
0.003
0.002
0.001
0.001
0.233
0.148
0.092
0.059
0.053
0.038
0.024
0.018 0.010
0.007
0.005
0.002
0.001
0.000 Period 25
Period 26 0.598
0.361
0.084
0.000
0.220
0.207
0.135
0.033
0.021
0.014
0.008
0.004
0.002
0.001
0.000 Period 26
Period 27 0.588
0.347
0.125
0.076
0.047 0.029
0.018
0.011
0.007
0.005
0.003
0.002 0.001
0.001
0.001
0.000 Period 27
Period 28 0.574
0.333
0.190
0.116
0.060
0.042
0.026
0.016
0.010
0.008
0.004
0.002
0.002
0.001
0.001
0.000
0.000 Period 28
Period 29 0.563
0.321
0.185
0.107
0.083
0.037 0.022
0.014
0.008
0.005
0.003
0.002
0.001
0.001
0.000
0.000
0.000 Period 29
0.000
0.068
Period 30 0.552
0.308
0.174
0.057
0.033
0.020
0.012
0.007
0.004
0.003
0.002
0.001
0.001
0.000
0.000
0.000 Period 30
Period 35 0.500
0.253
0.130
0.036
0.019
0.010
0.006
0.003
0.002
0.001
0.001
0.000
0.000
0.000
0.000
0.000 Period 35
Period 40 0.453
0.208
0.007
0.040
0.022
0.011
0.005
0.003
0.001
0.001
0.000
0.000
0.000
0.000
0.000
0.000
0.000
Period 40
Transcribed Image Text:Present Value of Annuity of $1.00 in Arrears*
Periods
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
22%
24%
26%
28%
30%
32%
40%
Periods
Period 1 0.980
0.002
0.943
0.026
0.909
0.893
0.877
0.862
0.847
0.833
0.820
0.806
0.794
0.781
0.769
0.758
0.714
Period 1
Period 2 1.942
1.886
1.833
1.783
1.736
1.690
1.647
1.605
1.566
1.528
1.492
1.457
1.424
1.392
1.361
1.331
1.224
Period 2
Period 3 2.884
2.775
2.673
2.577
2.487
2.402
2.322
2.246
2.174
2.106
2.042
1.981
1.923
1.868
1.816
1.766
1.589
Period 3
Period 4
3.808
3.630
3.465
3.312
3.170
3.037
2.914
2.798
2.690
2.589
2.494
2.404
2.320
2.241
2.166
2.096
1.849
Period 4
Period 5 4.713
Period 6
4.452
4.212
3.127
2.436
3.093
4.623
3.791
3.605
4.111
3.433
3.274
2.991
2.864
2.745
2.635
2.532
2.345
2.035
Period 5
5.601
5.242
4.017
4.355
3.889
3.685
3.498
3.326
3.167
3.020
2.885
2.759
2.643
2.534
2.168
Period 6
Period 7 6.472
6.002
5.582
5.206
4.868
4.564
4.288
4.039
3.812
3.605
3.416
3.242
3.083
2.937
2.802
2.677
2.263
Period 7
Period 8 7.325
6.733
6.210
5.747
5.335
4.908
4.630
4.344
4.078
3.837
3.619
3.421
3.241
3.076
2.925
2.786
2.331
Period 8
Period 9 8.182
7.435
6.802
6.247
5.759
5.328
4.940
4.607
4.303
4.031
3.786
3.566
3.366
3.184
3.019
2.868
2.379
Period 9
Period 10 8.983
8.111
7.360
6.710
6.145
5.650
5.218
4.833
4.494
4.192
3.923
3.682
3.465
3.269
3.092
2.030
2.414 Period 10
Period 11 9.787
8.760
7.887
7.139
6.495
5.938
5.453
5.020
4.656
4.327
4.035
3.776
3.543
3.335
3.147
2.978
2.438 Period 11
Period 12 10.575
9.385
8.384
7.536
6.814
6.194
5.680
5.197
4.793
4.430
4.127
3.851
3.606
3.387
3.190
3.013
2.456 Period 12
Period 13 11.348
9.986
8.853
7.904
7.103
6.424
5.842
5.342
4.910
4.533
4.203
3.912
3.658
3.427
3.223
3.040
2.469 Period 13
Period 14 12.108 10.563
9.295
8.244
7.367
6.628
6.002
5.468
5.008
4.611
4.265
3.962
3.695
3.459
3.249
3.061
2.478 Period 14
6.142
5.575
3.268
3.283
Period 15 12.849
11.118
9.712
8.559
7.606
6.811
5.092
4.675
4.315
4.001
3.726
3.483
3.076
2.484 Period 15
Period 16 13.578 11.652
10.106
8.851
7.824
6.974
6.265
5.688
5.162
4.730
4.357
4.033
3.751
3.503
3.088
2.489 Period 16
3.771
3.786
3.709
Period 17 14.292 12.166 10.477
9.122
8.022
7.120
6.373
5.749
5.222
4.775
4.391
4.059
3.518
3.205
3.097
2.492 Period 17
Period 18 14.992 12.659 10.828
9.372
8.201
7.250
6.467
5.818
5.273
4.812
4.419
4.080
3.529
3.304
3.104
2.494 Period 18
Period 19 15.678
13.134 11.158
9.604
8.365
7.366
6.550
5.877
5.318
4.843
4.442
4.007
3.539
3.311
3.109
2.496 Period 19
Period 20 18.351 13.590
11.470
9.818
8.514
7.489
6.623
5.920
5.353
4.870
4.460
4.110
3.808
3.546
3.316
3.113
2.497 Period 20
Period 21 17.011 14.029 11.784
10.017
8.649
7.562
6.687
5.973
5.384
4.891
4.476
4.121
3.816
3.551
3.320
3.116
2.498 Period 21
Period 22 17.658 14.451
12.042
10.201
8.772
7.645
6.743
6.011
5.410
4.900
4.488
4.130
3.822
3.556
3.323
3.118
2.498 Period 22
Period 23 18.292 14.857 12.303
10.371
8.883
7.718
6.792
6.044
5.432
4.925
4.499
4.137
3.827
3.559
3.325
3.120
2.499 Period 23
6.073
6.097
Period 24 18.014 15.247
4.937
4.948
12.550
10.529
8.085
7.784
6.835
5.451
4.507
4.143
3.831
3.562
3.327
3.121
2.499 Period 24
Period 25 19.523 15.622 12.783
10.675
9.077
7.843
6.873
5.467
4.514
4.147
3.834
3.564
3.329
3.122
2.499 Period 25
Period 26 20.121 15.983
13.003
10.810
9.161
7.896
6.908
6.118
5.480
4.956
4.520
4.151
3.837
3.566
3.330
3.123
2.500 Period 26
Period 27 20.707 16.330 13.211
10.935
9.237
7.943
6.935
6.136
5.492
4.964
4.524
4.154
3.839
3.567
3.331
3.123
2.500 Period 27
4.070
4.975
Period 28 21.281
16.683 13.406
11.051
9.307
7.984
6.961
6.152
5.502
4.528
4.157
3.840
3.568
3.331
3.124
2.500 Period 28
Period 29 21.844 16.984 13.591
11.158
9.370
8.022
6.983
6.186
5.510
4.531
4.159
3.841
3.569
3.332
3.124
2.500 Period 29
Period 30 22.398 17.292
13.765
11.258
9.427
8.055
7.003
6.177
5.517
4.979
4.534
4.160
3.842
3.569
3.332
3.124
2.500 Period 30
Period 35 24.999 18.665 14.498
11.655
9.644
8.176
7.070
6.215
5.539
4.992
4.541
4.164
3.845
3.571
3.333
3.125
2.500 Period 35
Period 40 27.355 19.793 15.046
11.925
9.779
8.244
7.105
6.233
5.548
4.997
4.544
4.166
3.846
3.571
3.333
3.125
2.500
Period 40
* Payments (or receipts) at the end of each period.
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