Which project would you select if you needed your money returned ASAP? The Accou
ID: 2762260 • Letter: W
Question
Which project would you select if you needed your money returned ASAP? The Accounting Rate of Return 'Overstates' actual cash flow for which project? Which project would you select to maximize the profit return? Your grandfather promises to give you $4,000 if you graduate from college in four years. If your hurdle rate is 5%, what is the present value of your grandfather's gift? You decided to save $ 1,000 per year and invest it into a 10 year annuity that accrues 8% degree semiannually. What will your investment be worth in 10 years?Explanation / Answer
Larry MOE Curly Year PV factor @10% Cash Flow PV of cash Flow Cash Flow PV of cash Flow Cash Flow PV of cash Flow Year 0 1.0000 (30,000.0) (30,000.0) (45,000.0) (45,000.0) (55,000.0) (55,000.0) Year 1 0.9091 5,000.0 4,545.5 18,000.0 16,363.6 20,000.0 18,181.8 Year 2 0.8264 5,000.0 4,132.2 13,000.0 10,743.8 25,000.0 20,661.2 Year 3 0.7513 5,000.0 3,756.6 20,000.0 15,026.3 20,000.0 15,026.3 Year 4 0.6830 5,000.0 3,415.1 10,000.0 6,830.1 15,000.0 10,245.2 Year 5 0.6209 20,000.0 12,418.4 20,000.0 12,418.4 10,000.0 6,209.2 Year 5 salvage 0.6209 2,000.0 1,241.8 6,000.0 3,725.4 10,000.0 6,209.0 PV of Cash inflows 29,509.6 65,107.7 76,532.7 Pay back Period in years = 4.5 3.7 2.5 Average Return per year 8,000.0 16,200.0 18,000.0 Avergae investment=(Investment+salvage)/2 16,000.0 25,500.0 32,500.0 Accounting rate of return =Average return per yr/Avg Investment 50% 64% 55% NPV = 29,019.1 20,107.7 21,532.7 Profitability Index= PV of cash inflows/Invetsment 0.984 2.170 2.551 IRR 9.5% 25.6% 24.9% Larry MOE Curly Year PV factor @9.5% Cash Flow PV of cash Flow Cash Flow PV of cash Flow Cash Flow PV of cash Flow Year 0 1.0000 (30,000.0) (30,000.0) (45,000.0) (45,000.0) (55,000.0) (55,000.0) Year 1 0.9132 5,000.0 4,566.2 18,000.0 16,438.4 20,000.0 18,264.8 Year 2 0.8340 5,000.0 4,170.1 13,000.0 10,842.1 25,000.0 20,850.3 Year 3 0.7617 5,000.0 3,808.3 20,000.0 15,233.1 20,000.0 15,233.1 Year 4 0.6956 5,000.0 3,477.9 10,000.0 6,955.7 15,000.0 10,433.6 Year 5 0.6352 20,000.0 12,704.6 20,000.0 12,704.6 10,000.0 6,352.3 Year 5 salvage 0.6352 2,000.0 1,270.5 6,000.0 3,811.4 10,000.0 6,352.3 (2.6) 20,985.2 22,486.4 IRR =9.5% MOE Year PV factor @25.6% Cash Flow PV of cash Flow Year 0 1.0000 (45,000.0) (45,000.0) Year 1 0.7962 18,000.0 14,331.2 Year 2 0.6339 13,000.0 8,240.7 Year 3 0.5047 20,000.0 10,093.9 Year 4 0.4018 10,000.0 4,018.3 Year 5 0.3199 20,000.0 6,398.6 Year 5 salvage 0.3199 6,000.0 1,919.6 2.3 IRR =25.6% Curly Year PV factor @24.94% Cash Flow PV of cash Flow Year 0 1.0000 (55,000.0) (55,000.0) Year 1 0.8004 20,000.0 16,007.7 Year 2 0.6406 25,000.0 16,015.4 Year 3 0.5127 20,000.0 10,254.8 Year 4 0.4104 15,000.0 6,155.8 Year 5 0.3285 10,000.0 3,284.7 Year 5 salvage 0.3285 10,000.0 3,284.7 3.0 IRR =24.94% If I need my money ASAP I shall select project Curly ARR overstates actual cash flow in Larry I shall select Larry to maximize return as NPV highest.
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