a)
To determine: The
Introduction:
Internal rate of return (IRR) is a projected rate of return for a particular project based on the given incremental cash flows of the project. This method considers all the cash flows of the particular project and adjusts the
Payback period refers to the number of periods it will take to recover the initial investments.
Net present value (NPV) refers to the discounted value of the future cash flows at present. The company should accept the project even if the net present value is positive or greater than zero. If there are two mutually exclusive projects, then the company has to select the project that has a higher net present value.
Accounting breakeven is a sales point at which, there is no profit or loss. It is the most widely used measure of the breakeven point.
b)
To determine: The internal
Introduction:
Cash breakeven specifies a sales level which can result in a zero operating cash flow.
c)
To determine: The internal rate of return (IRR) of the project, payback period, and net present value of the project based on the financial breakeven level of output.
Introduction:
Financial breakeven is a point that occurs at the time when a particular project breaks even on a financial basis. This means that the net present value is zero.
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Fundamentals of Corporate Finance
- 1. Desai Industries is analyzing an average-risk project, and the following data have been developed. Unit sales will be constant, but the sales price should increase with inflation. Fixed costs will also be constant, but variable costs should rise with inflation. The project should last for 3 years, it will be depreciated on a straight-line basis, and there will be no salvage value. No change in net operating working capital would be required. This is just one of many projects for the firm, so any losses on this project can be used to offset gains on other firm projects. What is the project's expected NPV? Do not round the intermediate calculations and round the final answer to the nearest whole number. WACC 10.0% Net investment cost (depreciable basis) Units sold $200,000 40,000 $25.00 Average price per unit, Year 1 Fixed op. cost excl. depr. (constant) Variable op. cost/unit, Year 1 Annual depreciation rate Expected inflation rate per year Tax rate $150,000 $20.20 33.333% 5.00%…arrow_forwardEhrmann Data Systems is considering a project that has the following cash flow and WACC data. What is the project's MIRR? Note that a project's projected MIRR can be less than the WACC (and even negative), in which case it will be rejected. WACC: 10.00% Year Cash flows 10.32% 11.35% 12.50% O 13.78% O 14.20% 0 -$2,000 1 $800 2 $800 3 $1,000arrow_forwardBasic NPV methods tell us that the value of a project today is NPV0. Time value of money issues also lead us to believe that if we choose not to do the project that it will be worth NPV1 one period from now, such that NPV0 > NPV1. Why then do we see some firms choosing to defer taking on a project?arrow_forward
- 4. Unequal project lives ABC Telecom has to choose between two mutually exclusive projects. If it chooses project A, ABC Telecom will have the opportunity to make a similar investment in three years. However, if it chooses project B, it will not have the opportunity to make a second investment. The following table lists the cash flows for these projects. If the firm uses the replacement chain (common life) approach, what will be the difference between the net present value (NPV) of project A and project B, assuming that both projects have a weighted average cost of capital of 12%? Cash Flow Project A Year 0: -$17,500 Year 0: $45,000 Year 1: 10,000 Year 1: 9,000 Year 2: 16,000 Year 2: 16,000 Year 3: 15,000 Year 3: 15,000 Year 4: 14,000 Year 5: 13,000 Year 6: 12,000 • $14,124 $14,955 $18,279 ● $16,617 • $13,294 ABC Telecom is considering a three-year project that has a weighted average cost of capital of 10% and a NPV of $45,681. ABC Telecom can replicate this project indefinitely. What…arrow_forwardCash Flow estimation Question Shultz Business Systems is analyzing an average-risk project, and the following data have been developed. Unit sales will be constant, but the sales price should increase with inflation. Fixed costs will also be constant, but variable costs should rise with inflation. The project should last for 3 years, it will be depreciated on a straight-line basis, and there will be no salvage value. This is just one of many projects for the firm, so any losses can be used to offset gains on other firm projects. What is the project's expected NPV? Project cost of capital (r) 10.0% Net investment cost (depreciable basis) $200,000 Units sold 50,000 Average price per unit, Year 1 $25.00 Fixed op. cost excl. deprec. (constant) $150,000 Variable op. cost/unit, Year 1 $20.20 Annual depreciation rate 33.333% Expected inflation rate per year 5.00% Tax rate 40.0% a. $15,925 b. $16,764 c.…arrow_forwardWhat information does the payback period provide? Suppose you are evaluating a project with the expected future cash inflows shown in the following table. Your boss has asked you to calculate the project’s net present value (NPV). You don’t know the project’s initial cost, but you do know the project’s regular, or conventional, payback period is 2.50 years. Year Cash Flow Year 1 $350,000 Year 2 $500,000 Year 3 $450,000 Year 4 $425,000 If the project’s weighted average cost of capital (WACC) is 8%, the project’s NPV (rounded to the nearest dollar) is: $312,620 $295,253 $277,885 $347,356 Which of the following statements indicate a disadvantage of using the regular payback period (not the discounted payback period) for capital budgeting decisions? Check all that apply. The payback period is calculated using net income instead of cash flows. The payback period does not take the project’s entire life into account.…arrow_forward
- A project under consideration has the following cash flows: Cash Year Flow 0 $27,300 1 11,300 2 14,300 3 10,300 What is the NPV for the project if the required return is 10 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV At a required return of 10 percent, should the firm accept this project? No Yes What is the NPV for the project if the required return is 26 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.) NPV At a required return of 26 percent, should the firm accept this project? Yesarrow_forward7. The NPV and payback period What information does the payback period provide? Suppose Praxis Corporation's CFO is evaluating a project with the following cash inflows. She does not know the project's initial cost; however, she does know that the project's regular payback period is 2.5 years. Year Year 1 Year 2 Year 3 Year 4 Cash Flow $350,000 $450,000 $475,000 $400,000 If the project's weighted average cost of capital (WACC) is 7%, what is its NPV? $300,440 $394,328 $413,105 $375,550 Which of the following statements indicate a disadvantage of using the discounted payback period for capital budgeting decisions? Check all that apply. The discounted payback period is calculated using net income instead of cash flows. The discounted payback period does not take the project's entire life into account. The discounted payback period does not take the time value of money into account.arrow_forward[EXCEL] Payback: Refer to Problem 5. What are the payback periods for production systems 1 and 2? If the systems are mutually exclusive and the firm always chooses projects with the lowest payback period, in which system should the firm invest? please use excel. Problem 5 info: 5. [EXCEL] Net present value: Blanda Incorporated management is considering investing in two alternative production systems. The systems are mutually exclusive, and the cost of the new equipment and the resulting cash flows are shown in the accompanying table. If the firm uses a 9 percent discount rate for production system projects, in which system should the firm invest? Year System 1 System 2 0 −$15,000 −$45,000 1 15,000 32,000 2 15,000 32,000 3 15,000 32,000arrow_forward
- Moving to another question will save this response. Question 4 XYZ is evaluating a project that would require an initial investment of $74,900.00 today. The project is expected to produce annual cash flows of $8,900.00 each year forever with the first annual cash flow expected in 1 year. The NPV of the project is $7,100.00. What is the IRR of the project? O 10.85% (plus or minus 0.02 percentage points) O 11.88% (plus or minus 0.02 percentage points) O 9.48% (plus or minus 0.02 percentage points) O 13.13% (plus or minus 0.02 percentage points) O None of the above is within 0.02 percentage points of the correct answer A Moving to another question will save this response.arrow_forward18. In a situation such as Acron's, where a one-time cost is followed by a sequence of cash flows, the internal rate of return (IRR) is the discount rate that makes the NPV equal to 0. The idea is that if the discount rate is greater than the IRR, the company will not pursue the project, but if the discount rate is less than the IRR, the project is financially attractive. a. Use Excel's Goal Seek tool to find the IRR for the Acron model. b. Excel also has an IRR function. Look it up in online help to see how it works, and then use it on Acron's model. Of course, you should get the same IRR as in part a. c. Verify that the NPV is negative when the discount rate is slightly greater than the IRR, and that it is positive when the discount rate is slightly less thanarrow_forward7. The NPV and payback period What information does the payback period provide? Suppose ABC Telecom Inc.’s CFO is evaluating a project with the following cash inflows. She does not know the project’s initial cost; however, she does know that the project’s regular payback period is 2.5 years. Year Cash Flow Year 1 $350,000 Year 2 $500,000 Year 3 $500,000 Year 4 $400,000 If the project’s weighted average cost of capital (WACC) is 10%, what is its NPV? $280,268 $224,214 $252,241 $322,308 Which of the following statements indicate a disadvantage of using the discounted payback period for capital budgeting decisions? Check all that apply. The discounted payback period does not take the project’s entire life into account. The discounted payback period is calculated using net income instead of cash flows. The discounted payback period does not take the time value of money into account.arrow_forward
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