Question
In: Finance
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. $6,000
Solutions
Expert Solution
DECISION
We must accept project B.
Since project B has Positive NPV, which means that project B has higher return then project A.
Project B has lower payback period which means Project B initial Investment can be recovered Earlier then project A.
Project B has higher IRR which represent that Project B has better return.
Since all the 3 Condition are favourable to Project B hence Project B should be Accepted.
jeff jeffy answered 2 years agoRelated Solutions
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UBTECH Robotics is expected to generate the following free cash
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UBTECH Robotics FCF Forecast ($ Millions) Year 1999, 2000, 2001,
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FCF (Amount in Millions)$55, $45, $89, $102, $84, $87
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Below are the expected cash flows and interest rates for the next nine years. Cash flows...
Below are the expected cash flows and interest rates for the
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Year 0
Years 1 - 2
8%
Year 1
Year 2
+$ 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...
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A five-year project, if undertaken, will require an initial
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Year
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$12,000
Year
2:
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Year
3:
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Year
4:
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Year
5:
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If the appropriate discount rate for this project is 15 percent,
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Relevant time for $12,000:?
Relevant time for $39,000:?
Relevant time for second $39,000:?
Relevant time for $30,000:?
Relevant time for $18,000:?
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Year
1
2
3
4
5
FCF ($ 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%
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13.8%
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a. The enterprise value of Heavy Metal
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Heavy Metal Corporation is expected to generate the following
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Year 1 : 54.4
Year 2: 66.2
Year 3: 79.5
Year 4: 73.6
Year 5: 80.2
Thereafter, the free cash flows are expected to grow at the
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year 1: $14
year...
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2
3
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You expect ABC Corporation to generate the following free cash flows over the next five years:...
You expect ABC Corporation to generate the following free cash
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Year
1
2
3
4
5
FCF ($ millions)
75
84
96
111
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Beginning with year
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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
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