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In: Finance

Fill in the blanks questions: 1. Does the NPV rule account for the time value of...

Fill in the blanks questions:

1.

Does the NPV rule account for the time value of money?

Does the NPV rule account for the risk of the cash flows?

Does the NPV rule provide an indication about the increase in value?

Should we consider the NPV rule for our primary decision rule?

2.

Does the payback rule account for the time value of money?

Does the payback rule account for the risk of the cash flows?

Does the payback rule provide an indication about the increase in value?

Should we consider the payback rule for our primary decision rule?

3.

Does the discounted payback rule account for the time value of money?

Does the discounted payback rule account for the risk of the cash flows?

Does the discounted payback rule provide an indication about the increase in value?

Should we consider the discounted payback rule for our primary decision rule?

4.

An investment project has the following cash flows: CF0 = -1,000,000; C01 – C08 = 200,000 each

If the required rate of return is 12%, what decision should be made using NPV?

How would the IRR decision rule be used for this project, and what decision would be reached?

Expert Solution

1.

Does the NPV rule account for the time value of money?
YES

Does the NPV rule account for the risk of the cash flows?
YES

Does the NPV rule provide an indication about the increase in value?
YES

Should we consider the NPV rule for our primary decision rule?
YES

2.

Does the payback rule account for the time value of money?
NO

Does the payback rule account for the risk of the cash flows?
NO

Does the payback rule provide an indication about the increase in value?
NO

Should we consider the payback rule for our primary decision rule?
NO

3.

Does the discounted payback rule account for the time value of money?
YES

Does the discounted payback rule account for the risk of the cash flows?
YES

Does the discounted payback rule provide an indication about the increase in value?
NO

Should we consider the discounted payback rule for our primary decision rule?
NO

4.

An investment project has the following cash flows: CF0 = -1,000,000; C01 – C08 = 200,000 each

If the required rate of return is 12%, what decision should be made using NPV?
NPV=-1000000+200000/12%*(1-1/1.12^8)=-6472.046632
Reject the project

How would the IRR decision rule be used for this project, and what decision would be reached?
IRR:
-1000000+200000/IRR*(1-1/(1+IRR)^8)=0
=>IRR=11.81%
Reject the project

jeff jeffy answered 1 year ago

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