Question
In: Finance
q.1 Discounted payback period. Becker, Inc. uses the discounted payback period for projects costing less than...
q.1
Discounted payback
period.
Becker, Inc. uses the discounted payback period for projects costing less than $25,000 and has a cutoff period of four years for these small-value projects. Two projects, R and S, are under consideration. Their anticipated cash flows are listed in the following table. If Becker uses a discount rate of
4 %4%
on these projects, are they accepted or rejected? If it uses a discount rate of
12 %12%?
A discount rate of
18 %18%?
Why is it necessary to look at only the first four years of the projects' cash flows?
|
Cash Flow |
Project R |
Project S |
|||
|
Initial Cost |
$20 comma 00020,000 |
$17 comma 00017,000 |
|||
|
Cash flow year 1 |
$4 comma 0004,000 |
$8 comma 5008,500 |
|||
|
Cash flow year 2 |
$6 comma 0006,000 |
$6 comma 8006,800 |
|||
|
Cash flow year 3 |
$8 comma 0008,000 |
$5 comma 1005,100 |
|||
|
Cash flow year 4 |
$10 comma 00010,000 |
$3 comma 4003,400 |
|||
With a discount rate of
44%,
the cash outflow for project R is: (Select the best response.)
A.
fully recovered in 3 years comma so reject.fully recovered in 3 years, so reject.
B.
fully recovered in 5 years, so accept.
C.
fully recovered in 4 years comma so accept.fully recovered in 4 years, so accept.
D.
not fully recovered in four years, so reject.
q.2
Net present
value.
Quark Industries has three potential projects, all with an initial cost of
$1 comma 900 comma 0001,900,000.
The capital budget for the year will allow Quark to accept only one of the three projects. Given the discount rate and the future cash flow of each project, determine which project Quark should accept.
|
Cash Flow |
Project M |
Project N |
Project O |
||||
|
Year 1 |
$500 comma 000500,000 |
$600 comma 000600,000 |
$1 comma 000 comma 0001,000,000 |
||||
|
Year 2 |
$500 comma 000500,000 |
$600 comma 000600,000 |
$800 comma 000800,000 |
||||
|
Year 3 |
$500 comma 000500,000 |
$600 comma 000600,000 |
$600 comma 000600,000 |
||||
|
Year 4 |
$500 comma 000500,000 |
$600 comma 000600,000 |
$400 comma 000400,000 |
||||
|
Year 5 |
$500 comma 000500,000 |
$600 comma 000600,000 |
$200 comma 000200,000 |
||||
|
Discount rate |
88% |
1111% |
1616% |
||||
Which project should Quark accept? (Select the best response.)
A.
Project Upper NProject N
B.
Project Upper OProject O
C.
Project Upper MProject M
D.
None of the projects
q.3
Profitability
index.
Given the discount rate and the future cash flow of each project listed in the following table, use the PI to determine which projects the company should accept.
|
Cash Flow |
Project U |
Project V |
|||
|
Year 0 |
minus−$1 comma 900 comma 0001,900,000 |
minus−$2 comma 500 comma 0002,500,000 |
|||
|
Year 1 |
$475 comma 000475,000 |
$1 comma 250 comma 0001,250,000 |
|||
|
Year 2 |
$475 comma 000475,000 |
$1 comma 000 comma 0001,000,000 |
|||
|
Year 3 |
$475 comma 000475,000 |
$750 comma 000750,000 |
|||
|
Year 4 |
$475 comma 000475,000 |
$500 comma 000500,000 |
|||
|
Year 5 |
$475 comma 000475,000 |
$250 comma 000250,000 |
|||
|
Discount rate |
77% |
1414% |
|||
What is the PI of project U?
nothing
(Round to two decimal places.)
4.
MIRR unequal
lives.
Grady Enterprises is looking at two project opportunities for a parcel of land the company currently owns. The first project is a restaurant, and the second project is a sports facility. The projected cash flow of the restaurant is an initial cost of
$1 comma 570 comma 0001,570,000
with cash flows over the next six years of
$180 comma 000180,000
(year one),
$280 comma 000280,000
(year two),
$ 260 comma 000$260,000
(years three through five), and
$1 comma 740 comma 0001,740,000
(year six), at which point Grady plans to sell the restaurant. The sports facility has the following cash flows: an initial cost of
$2 comma 440 comma 0002,440,000
with cash flows over the next four years of
$370 comma 000370,000
(years one through three) and
$2 comma 560 comma 0002,560,000
(year four), at which point Grady plans to sell the facility. The appropriate discount rate for the restaurant is
10.510.5%
and the appropriate discount rate for the sports facility is
11.511.5%.
What are the MIRRs for the Grady Enterprises projects? What are the MIRRs when you adjust for the unequal lives? Do the MIRR adjusted for unequal lives change the decision based on the MIRRs? Hint: Take all cash flows to the same ending period as the longest project.
If the appropriate reinvestment rate for the restaurant is
10.510.5%,
what is the MIRR of the restaurant project?
nothing%
(Round to two decimal places.)
Solutions
Expert Solution
| Present Value(PV) of Cash Flow: | ||||||||
| (Cash Flow)/((1+i)^N) | ||||||||
| i=discount rate | ||||||||
| N=Year of Cash Flow | ||||||||
| CASH FLOW ANALYSIS OF PROJECT R | ||||||||
| N | Year | 0 | 1 | 2 | 3 | 4 | ||
| a | Cash Flow | -$20,000 | $ 4,000 | $ 6,000 | $ 8,000 | $ 10,000 | ||
| PV4=a/(1.04^N) | Present Value at discount rate 4%(0.04) | -$20,000 | $3,846 | $5,547 | $7,112 | $8,548 | ||
| CPV4 | Cumulative Present Value at discount rate4% | -$20,000 | -$16,154 | -$10,607 | -$3,495 | $5,054 | ||
| PV12=a/(1.12^N) | Present Value at discount rate 12%(0.12) | -$20,000 | $3,571 | $4,783 | $5,694 | $6,355 | ||
| CPV12 | Cumulative Present Value at discount rate12% | -$20,000 | -$16,429 | -$11,645 | -$5,951 | $404 | ||
| PV18=a/(1.18^N) | Present Value at discount rate 18%(0.18) | -$20,000 | $3,390 | $4,309 | $4,869 | $5,158 | ||
| CPV18 | Cumulative Present Value at discount rate4% | -$20,000 | -$16,610 | -$12,301 | -$7,432 | -$2,274 | ||
| PV44=a/(1.44^N) | Present Value at discount rate 44%(0.44) | -$20,000 | $2,778 | $2,894 | $2,679 | $2,326 | ||
| CPV44 | Cumulative Present Value at discount rate44% | -$20,000 | -$17,222 | -$14,329 | -$11,650 | -$9,324 | ||
| At Discount Rate of 4% Project R is accepted | Cumulative Present Value is POSITIVE | |||||||
| At Discount Rate of 12% Project R is accepted | Cumulative Present Value is POSITIVE | |||||||
| At Discount Rate of 18% Project R is Rejected | Cumulative Present Value is NEGATIVE | |||||||
| At discount rate 44%, Cash flow is not fully recovered in 4 years, so reject | ||||||||
| CASH FLOW ANALYSIS OF PROJECT S | ||||||||
| N | Year | 0 | 1 | 2 | 3 | 4 | ||
| a | Cash Flow | -$17,000 | $ 8,500 | $ 6,800 | $ 5,100 | $ 3,400 | ||
| PV4=a/(1.04^N) | Present Value at discount rate 4%(0.04) | -$17,000 | $8,173 | $6,287 | $4,534 | $2,906 | ||
| CPV4 | Cumulative Present Value at discount rate4% | -$17,000 | -$8,827 | -$2,540 | $1,994 | $4,900 | ||
| PV12=a/(1.12^N) | Present Value at discount rate 12%(0.12) | -$17,000 | $7,589 | $5,421 | $3,630 | $2,161 | ||
| CPV12 | Cumulative Present Value at discount rate12% | -$17,000 | -$9,411 | -$3,990 | -$360 | $1,801 | ||
| PV18=a/(1.18^N) | Present Value at discount rate 18%(0.18) | -$17,000 | $7,203 | $4,884 | $3,104 | $1,754 | ||
| CPV18 | Cumulative Present Value at discount rate4% | -$17,000 | -$9,797 | -$4,913 | -$1,809 | -$55 | ||
| PV44=a/(1.44^N) | Present Value at discount rate 44%(0.44) | -$17,000 | $5,903 | $3,279 | $1,708 | $791 | ||
| CPV44 | Cumulative Present Value at discount rate44% | -$17,000 | -$11,097 | -$7,818 | -$6,110 | -$5,319 | ||
| At Discount Rate of 4% Project R is accepted | Cumulative Present Value is POSITIVE | |||||||
| At Discount Rate of 12% Project R is accepted | Cumulative Present Value is POSITIVE | |||||||
| At Discount Rate of 18% Project R is Rejected | Cumulative Present Value is NEGATIVE | |||||||
| At discount rate 44%, Cash flow is not fully recovered in 4 years, so reject | ||||||||
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