Concept explainers
a.
To calculate: The standard deviations of Year 1, Year 5, and Year 10.
Introduction:
Standard deviation (SD):
A statistical tool that helps measure the deviation or volatility of an investment is termed as the standard deviation. It is the square root of variance.
b.
To draw: The diagram of the mean (expected value) and SD for three years.
Introduction:
Expected value:
It is also known as mean. It is the value that is estimated or anticipated to earn in the future from an investment. It is computed by adding up the values that occur by multiplying each of the outcomes with their probabilities.
Standard deviation (SD):
A statistical tool that helps measure the deviation or volatility of an investment is termed as the standard deviation. It is the square root of variance.
c.
To calculate: The values and differences in the values of discount rates of 6% and 12% at Year 1, Year 5, and Year 10.
Introduction:
Discount Rate:
A rate that is used for the calculation of the present value of the cash flows is termed as the discount rate.
d.
To explain: The relation between the increase in risk overtime shown in the diagram in part (c) and the large differences in PVIFS computed in the part (b).
Introduction:
Risk:
The future uncertainty of the deviation between actual and expected outcome is termed as risk. Risk is the quantified representation of uncertainty that an investor is willing to take on the investments.
e.
To calculate: The investment is accepted on the basis of the NPV or not.
Introduction:
It is the difference between the PV (present value) of
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Loose Leaf for Foundations of Financial Management Format: Loose-leaf
- An investment project has annual cash inflows of $4,900, $3,400, $4,600, and $3,800, for the next four years, respectively. The discount rate is 13 percent. a. What is the discounted payback period for these cash flows if the initial cost is $5,200? b. What is the discounted payback period for these cash flows if the initial cost is $7,300? c. What is the discounted payback period for these cash flows if the initial cost is $10,300?arrow_forwardPerform a financial analysis for a project using the format provided in Figure 4-5. Assume that the projected costs and benefits for this project are spread over four years as follows: Estimated costs are $300,000 in Year 1 and $40,000 each year in Years 2, 3, and 4. Estimated benefits are $0 in Year 1 and $120,000 each year in Years 2, 3, and 4. Use a 7 percent discount rate, and round the discount factors to two decimal places. Create a spreadsheet or use the business case financials template on the Companion website to calculate and clearly display the NPV, ROI, and year in which payback occurs. In addition, write a paragraph explaining whether you would recommend investing in this project, based on your financial analysis.arrow_forwardPerform a financial analysis of a project assuming that the projected costs and benefits for this project are spread over four years as follows: Estimated costs are $200,000 in Year 1 and $30,000 each year in Years 2,3 and 4. Estimated benefits are $0 in year 1 and $100,000 each year in Years 2,3 and 4. Use a 9 percentage, discount rate, round the discount factors to two decimal places. Create a table of financial template on the paper to calculate and clearly display the NPV, ROI and year in which payback occurs with the help of a graph. In addition, write a paragraph explaining whether you would recommend investing in this project, based on your financial analysis.arrow_forward
- 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?arrow_forwardFor the following table, assume a MARR of 10% per year and a useful life for each alternative of six years that equals the study period. The rank-order of alternatives from least capital investment to greatest capital investment is Do Nothing → A → C → B. Complete the IRR analysis by selecting the preferred alternative. The IRR of A (C→ B) is%. (Round to one decimal place.) A Capital investment A Annual revenues A Annual costs A Market value A IRR Do Nothing → A - $15,000 4,000 - 1,000 6,000 12.7% A → C - $2,000 900 -150 -2,220 10.5% C → B -$3.500 460 -75 3.500 ???arrow_forwardPerform a financial analysis for a project using the format provided in Figure 4-5. Assume that the projected costs and benefits for this project are spread over four years as follows: Estimated costs are $200,000 in Year 1 and $30,000 each year in Years 2, 3, and 4. Estimated benefits are $0 in Year 1 and $100,000 each year in Years 2, 3, and 4. Use a 9 percent discount rate, and round the discount factors to two decimal places. Create a spreadsheet or use the business case financials template on the companion website to calculate and clearly display the NPV, ROI, and year in which payback occurs. In addition, write a paragraph explaining whether you would recommend investing in this project, based onyour financial analysis.arrow_forward
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- REQUIRED Use the information provided below to calculate the following: 5.1 Payback Period of both projects (expressed in years, months and days). 5.2 Accounting Rate of Return (on initial investment) of Project Spik (expressed to two decima places). 5.3 Net Present Value of both projects. 5.4 Internal Rate of Return of Project Spik (expressed to two decimal places). Your answer must include two net present value calculations (using consecutive rates/percentages) and interpolation. INFORMATION Telco Ltd had to choose between purchasing machinery for two projects, Spik and Span, for which the following profits are forecast: Year 1 2 3 4 Spik R70 000 R70 000 R70 000 R70 000 Span R20 000 R60 000 R120 000 R70 000 Each project requires an investment of R800 000. Project Span is expected to have a scrap value of R40 000. The cost of capital is 12%. The straight-line method of depreciation is used. Ignore taxes.arrow_forwardA project with the following cash flows received each year and with a required return of 8%. With the information given, compute:i. Discounted payback period ii. Net Present Value and iii. Profitability Index.arrow_forwardAn investment project has annual cash inflows of $4,400, $3,900, $5,100, and $4,300, for the next four years, respectively. The discount rate is 14 percent. a. What is the discounted payback period for these cash flows if the initial cost is $5,700? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the discounted payback period for these cash flows if the initial cost is $7,800? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. What is the discounted payback period for these cash flows if the initial cost is $10,800? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) a. Discounted payback period years b. Discounted payback period years C. Discounted payback period yearsarrow_forward
- Principles of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College