11) Compute the Payback statistic for Project X and recommend whether the firm s
ID: 2750978 • Letter: 1
Question
11)
Compute the Payback statistic for Project X and recommend whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 10 percent and the maximum allowable payback is 5 years.
TIME: 0 1 2 3 4 5
CASH FLOW: - 75 - 75 0 100 75 90
12)
Compute the IRR statistic for Project X and note whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 10 percent.
TIME: 0 1 2 3 4 5
CASH FLOW: - 75 - 75 0 100 75 90
15)
Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown below. The required rate of return on projects of both of their risk class is 8 percent, and that the maximum allowable payback and discounted payback statistic for the projects are 2 and 3 years, respectively.
TIME: 0 1 2 3
Project A CF: $ - 10,000 $ 10,000 $ 30,000 $ 3,000
Project B CF: $ - 30,000 $ 10,000 $ 20,000 $ 50,000
Use the Profitability Index (PI) decision rule to evaluate these
Explanation / Answer
11)
The payback statistics clearly says that since the net present valu is less than the last cashinflow present value therefore the payback happens only in the 5th year
12) IRR is the internal rate of return at which the net present value of the project becomes zero thereofre the IRR would be Between 12 and 12.1% because at 12.1% the IRR is close negative see below
15) For project A
Since the presnet value is positive the profotability index = cashinflow /cash outflow = 37360/10000 = 3.73
36097.64772
Therefore Profitability index for B = 66097/30000 = 2.20
Years Cash Discount factor 10% Net present value 0 -75 1 -75 1 -75 0.909 -68.18181818 2 0 0.826 0 3 100 0.751 75.13148009 4 75 0.683 51.22600915 5 90 0.621 55.88291908 Net present value 39.05859014Related Questions
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