QUESTION 7a Determine the IRR on the following projects: a. Initial outlay of $3
ID: 2676900 • Letter: Q
Question
QUESTION 7aDetermine the IRR on the following projects:
a. Initial outlay of $35,000 with an after-tax cash flow at the end of the year of $5,836 for seven years
b. Initial outlay of $350,000 with an after-tax cash flow at the end of the year of $70,000 for seven years
c. Initial outlay of $3,500 with an after-tax cash flow at the end of the year of $1,500 for three years
QUESTION 7b
Discuss the merits and shortcomings of using the payback period for capital budgeting decisions.
QUESTION 7c
Project November requires an initial investment of $500,000. The present value of operating cash flows is $550,000. Project December requires an initial investment of $750,000. The present value of operating cash flows is $810,000.
a. Compute the profitability index for each project.
b. If the the projects are mutually exclusive, does the profitability index rank them correctly?
QUESTION 7d
Black Friday Inc. has estimated the following cash flows for a project it is considering:
Period Cash Flow
0 ($150,000)
1 $70,000
2 $80,000
3 ($100,0000)
a) What is the payback period for this project?
b) What is the obvious problem with using the payback method in this case?
Explanation / Answer
Determine the IRR on the following projects:
a. Initial outlay of $35,000 with an after-tax cash flow at the end of the year of $5,836 for seven years
b. Initial outlay of $350,000 with an after-tax cash flow at the end of the year of $70,000 for seven years
c. Initial outlay of $3,500 with an after-tax cash flow at the end of the year of $1,500 for three years
a. IO = ACFt PVIF[IRR%, t yr.]
$35,000 = $5,836 PVIF[IRR%, 7 yr.]
, IRR = 4%
b. $350,000 = $70,000 PVIF[IRR%, 7 yr.]
IRR = 9.2%
c. $3,500 = $1,500 PVIF[IRR%, 3 yr.]
, IRR = 13.7%
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