The table below gives the initial investment and expected cash flows over the next five years...

The table below gives the initial investment and expected cash flows over the next five years for two different projects. Assume that the industry you are in expects a return of 10%, which you use as the discount rate in net present value (NPV) calculations and as the required rate of return for purposes of deciding on projects. Also, assume that management only wants to invest in projects that pay off within four years.

For each project, compute the payback period, NPV, and internal rate of return (IRR). Then explain whether each project should be accepted based on these three criteria.

Project A. Project B

Initial

Investment. $40,000. $28,000

Year. Cash Flows

1. $10,000. $10,000

2. $10,000. $13,000

3. $10,000. $5,000

4. $10,000. $5,000

5. $10,000. $6,000

Solutions

Expert Solution

DECISION

We must accept project B.

Since project B has Positive NPV, which means that project B has higher return then project A.

Project B has lower payback period which means Project B initial Investment can be recovered Earlier then project A.

Project B has higher IRR which represent that Project B has better return.

Since all the 3 Condition are favourable to Project B hence Project B should be Accepted.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

UBTECH Robotics is expected to generate the following free cash flows over the next five years....

UBTECH Robotics is expected to generate the following free cash flows over the next five years. After which, the free cash flows are expected to grow at the industry average of 3% per year. Using the discounted free cash flow model and the weighted average cost of capital of 11% UBTECH Robotics FCF Forecast ($ Millions) Year 1999, 2000, 2001, 2002, 2003, 2004 FCF (Amount in Millions)$55, $45, $89, $102, $84, $87 a. Estimate the enterprise value (V0) of UBTECH...

Below are the expected cash flows and interest rates for the next nine years. Cash flows...

Below are the expected cash flows and interest rates for the next nine years. Cash flows will occur at the end of the nominated years. Cash Flows Interest Rates Year 0 Years 1 - 2 8% Year 1 Year 2 +$ 6,500 Year 3 +$ 1,500 Years 3 – 8 6% Year 4 Year 5 Year 6 -$ 2,500 Year 7 Year 8 Year 9 +$ 10,000 Years 9 - 10 7% Year 10 i. Using the Table function within...

A five-year project, if undertaken, will require an initial investment of $95,000. The expected cash flows...

A five-year project, if undertaken, will require an initial investment of $95,000. The expected cash flows are: Year 1: $12,000 Year 2: $39,000 Year 3: $39,000 Year 4: $30,000 Year 5: $18,000 If the appropriate discount rate for this project is 15 percent, what is the value of this project today? Relevant time for $12,000:? Relevant time for $39,000:? Relevant time for second $39,000:? Relevant time for $30,000:? Relevant time for $18,000:? Relevant rate:? Value of $12,000:? Value of $39,000:?...

Heavy Metal Corporation is expected to generate the following free cash flows over the next five...

Heavy Metal Corporation is expected to generate the following free cash flows over the next five years. Year 1 2 3 4 5 FCF ($ million) 53.2 68.1 79.3 74.3 83.5 Thereafter, the free cash flows are expected to grow at the industry average of 4.4% per year. Use the discounted free cash flow model and a WACC of 13.8% to estimate the following. a. The enterprise value of Heavy Metal b. Heavy Metal's share price if the company has...

Heavy Metal Corporation is expected to generate the following free cash flows over the next five...

Heavy Metal Corporation is expected to generate the following free cash flows over the next five years: Year 1 2 3 4 5 FCF ($ million) 51.7 66.4 76.7 76.5 82.4 Thereafter, the free cash flows are expected to grow at the industry average of 4.3 % per year. Using the discounted free cash flow model and a weighted average cost of capital of 13.2 %: a. Estimate the enterprise value of Heavy Metal. b. If Heavy Metal has no...

Plane Industries is expected to generate the free cash flows over the next four years (listed...

Plane Industries is expected to generate the free cash flows over the next four years (listed below), after which they are expected to grow at a rate of 5% per year. Cash flows are in millions of dollars. If the weighted average cost of capital is 12% and Plane Industries has cash of $65 million, debt of $45 million, and 30 million shares outstanding, what is Plane company's expected current share price? Cash Flow by year year 1: $14 year...

Conundrum Mining is expected to generate the above free cash flows over the next four years,...

Conundrum Mining is expected to generate the above free cash flows over the next four years, after which they are expected to grow at a rate of 5% per year. If the weighted average cost of capital is 12% and Conundrum has cash of $80 million, debt of $60 million, and 30 million shares outstanding, what is Conundrum's expected current share price? Year 1 2 3 4 Free Cash Flow $12 million $18 million $22 million $26 million $16.16 $16.25...

You expect ABC Corporation to generate the following free cash flows over the next five years:...

You expect ABC Corporation to generate the following free cash flows over the next five years: Year 1 2 3 4 5 FCF ($ millions) 75 84 96 111 120 Beginning with year six, you estimate that ABC's free cash flows will grow at 6% per year and that ABC's weighted average cost of capital is 15%. If ABC has $500 million of debt, $50 million of cash, and 14 million shares of stock outstanding, then what is the price...

Suppose a company had an initial investment of $40,000. The cash flow for the next five...

Suppose a company had an initial investment of $40,000. The cash flow for the next five years are $17,000, $19,000, $20,000, $20,000, and $14,000, respectively. The interest rate is 11%. Enter your answers rounded to 2 DECIMAL PLACES. #1What is the discounted payback period? #2If the firm accepts projects with discounted payback periods of less than 3 years, will the project be accepted? Yes No #3What is the NPV of the project?

You are evaluating a project with the following cash flows: initial investment is $-23, and the expected...

You are evaluating a project with the following cash flows: initial investment is $-23, and the expected cash flows for years 1 - 3 are $12, $9 and $8 (all cash flows are in millions of dollars). What is this projects NPV? The company's WACC is 9%. Express your answer in millions of dollars, rounded to 2 decimals and without the dollar sign. So, if your answer is 23.5678, just enter 23.57.

Subjects