Academic Integrity: tutoring, explanations, and feedback — we don’t complete graded work or submit on a student’s behalf.

$80,000. Th 1) Birdman, Inc. is currently considering an eight-year project that

ID: 2759353 • Letter: #

Question

$80,000. Th 1) Birdman, Inc. is currently considering an eight-year project that has an initial outlay or cost of future cash inflows from its project for years 1 through 8 are the same at $30,000. Birdman has a discount rate of 13%. Because of concerns about funds being short to finance all good projects, Birdman wants to compute the profitability index (PI) for each project. What is the PI for Birdman's current project 2) Hollister, Inc. is currently considering an eight-year project that has an initial outlay or cost of $120,000. The future cash inflows from its project for years 1 through 8 are the same at $30,000. Hollister has a discount rate of 11% Because of capital rationing (shortage of funds for financing), Hollister wants to compute the profitability index (PI) for each project. What is the PI for Hollister's current project? 3) Wyatt and Zachary Enterprises (WZE) uses the Modified Intemal Rate of Return (MIRR) when evaluating projects. wzE's cost of capital is 9.75%. What is the MER of a project if the initial cost is $1,200,000 and the project will last seven years, with each year producing cash inflows of $290,000? Should WZE accept this project according to the MIRR method? Explain. 4) Ace, Inc. is considering Project A and Project B, which are two mutually exclusive projects with unequal lives. Project A is an eight-year project that has an initial outlay or cost of $18,000. Its future cash inflows for years 1 through 8 are the same at $3,800. Project B is a six-year project that has an initial outlay or cost of $16,000. Its future cash inflows for years 1 through 6 are the same at $3,600. Ace uses the equivalent method and has a discount rate of 1.50%. Which, if any, project will Ace accept? years 1 through 6 are the same at $3,600. Ace uses the equivalent annual annuity (EAA) 5) Apple, Inc. is considering Project A and Project B, which are two mutually exclusive projects with unequal lives Project A is an eight-year project that has an initial outlay or cost of $140,000. Its future cash inflows for years 1 through 8 are the same at $36,500. Project B is a six-year project that has an initial outlay or cost of $160,000. Its future cash inflows for years 1 through 6 are the same at $48,000 Apple uses the equivalent annual annuity (EAA) method and has a discount rate of 13%. Which project(s), if any, will Apple accept? ears 1 through 6 are the same at $48,000. Apple uses the equivalent annual annuity (EAA) 6) Simpson, Inc. is considering a five-year project that has an initial after-tax outlay or after-tax cost of $80,000. The respective future cash inflows from its project for years 1, 2. 3, 4 and 5 are: $15,000, $25,000, $35,000, $45,000 and $55,000. Simpson uses the net present value maethod and has a discount rate of 9%. Will Simpson accept the project? 7) Consider the following four-year project. The initial outlay or cost is $180,000. The respective cash inflows for years 1, 2, 3 and 4 are: $100,000, s30,000, S80,000 and $20,000. What is the discounted payback period if the discount rate is 1196? 0o and $20.000 Wheat a the disccunted payback period if th

Explanation / Answer

1)

Calculate the profitability index:

Profitability Index (PI) = 1+ (NPV / Initial investment required)

= 1+ ($63,963note / $80,000)

= 1+ 0.79954

=1.79954

note:

Years

Cash flows

Discounting
factor @13%

Discounted
cash flows

0

$       (80,000)

1

$ (80,000.00)

1-8

$         30,000

4.79877

$ 143,963.10

NPV

$    63,963.10

  

Therefore, profitability index is 1.79954.

2)

Calculate the profitability index:

Years

Cash flows

Discounting
factor @11%

Discounted
cash flows

0

$     (120,000)

1

$ (120,000.00)

1-8

$         30,000

5.1461

$    154,383.00

NPV

$      34,383.00

Profitability Index (PI) = 1+ (NPV / Initial investment required)

= 1 + ($34,383 / $120,000)

= 1+0.28653

=1.28653

Therefore, Profitability Index is 1.28653.

3)

Calculation of MIRR:

Year

Cash flows

FV factor @9.75%

Formula

Terminal value

0

$       (1,200,000)

1

$             290,000

1.09750

(1+9.75%)^(7-1)

$      318,275.00

2

$             290,000

1.20451

(1+9.75%)^(7-2)

$      349,307.90

3

$             290,000

1.32195

(1+9.75%)^(7-3)

$      383,365.50

4

$             290,000

1.45084

(1+9.75%)^(7-4)

$      420,743.60

5

$             290,000

1.59229

(1+9.75%)^(7-5)

$      461,764.10

6

$             290,000

1.74754

(1+9.75%)^(7-6)

$      506,786.60

7

$             290,000

1.91793

(1+9.75%)^(7-7)

$      556,199.70

$ 2,996,442.40


MIRR = 7 ($2,996,442/$1,200,000)

= 72.497035

= 7 * 1.580201

= 11.06%

4)

Calculation of Equivalent Annual Annuity:

Project-A:

Years

Cash flows

Discounting
factor @11.5%

Discounted
cash flows

0

$             (18,000)

1

$       (18,000.00)

1-8

$                  3,800

5.05564

$         19,211.43

NPV

$            1,211.43

C = r (NPV) / 1-(1+r)-n

Where:

C= Equivalent annuity cash flow

NPV = Net present value

R = rate per period

N= number of periods

C = 11.50% ($1,211)/ 1-(1+11.50%)-8

=$139.2650 / 1-(1.115) -8

= $139.2650 / 1- 0.0003791

= $139.2650 / 0.9996209

= $139.32

Project-B:

Years

Cash flows

Discounting
factor @11.5%

Discounted
cash flows

0

$             (16,000)

1

$       (16,000.00)

1-6

$                  3,600

4.1703

$         15,013.08

NPV

$             (986.92)

C = r (NPV) / 1-(1+r)-n

C = 11.50% (-$987)/ 1-(1+11.50%)-6

= -$113.51 /1-(1.115) -6

= -$113.51 /1- 0.0027652

= -$113.51 /0.9972348

=-$ 113.83

Therefore, Project A should be accepted.

Years

Cash flows

Discounting
factor @13%

Discounted
cash flows

0

$       (80,000)

1

$ (80,000.00)

1-8

$         30,000

4.79877

$ 143,963.10

NPV

$    63,963.10