A has the larger NPV t, so the NPV and IRR rankings will Sur decision rule is thus very simple: Take A if the required return if there's a conflict, we will go with the is less than 10.61 percent, take B if the required return is between 10.61 percent and 32.37 percent (the IRR on B), and take neither if the required return is more than 32.37 percent. Here we need to calculate the ratio of average net income to average book value to higher get the AAR. Average net income is: Average net income = ($1,000+2,000 +4,000)/3 = $2,333.33 Average book value is: Average book value = $9,000/2 = $4,500 Se. the average accounting return is: 1 AR=$2,333.33/$4,500 = .5185, or 51.85% is is an impressive return. Remember, however, that it isn't really a rate of return ike an interest rate or an IRR, so the size doesn't tell us a lot. In particular, our money is probably not going to grOW at 51.85 percent per year, sorry to say. TICAL THINKING AND CONCEPTS REVIEW Payback Period and Net Present Value If a project with conventional 8.1 cash flows has a payback period less than its life, can you definitively state the algebraic sign of the NPV? Why or why not? 8.2 Net Present Value Suppose a project has conventional cash flows and a positive NPV. What do you know about its payback? Its profitability index? Its IRR? Explain.
A has the larger NPV t, so the NPV and IRR rankings will Sur decision rule is thus very simple: Take A if the required return if there's a conflict, we will go with the is less than 10.61 percent, take B if the required return is between 10.61 percent and 32.37 percent (the IRR on B), and take neither if the required return is more than 32.37 percent. Here we need to calculate the ratio of average net income to average book value to higher get the AAR. Average net income is: Average net income = ($1,000+2,000 +4,000)/3 = $2,333.33 Average book value is: Average book value = $9,000/2 = $4,500 Se. the average accounting return is: 1 AR=$2,333.33/$4,500 = .5185, or 51.85% is is an impressive return. Remember, however, that it isn't really a rate of return ike an interest rate or an IRR, so the size doesn't tell us a lot. In particular, our money is probably not going to grOW at 51.85 percent per year, sorry to say. TICAL THINKING AND CONCEPTS REVIEW Payback Period and Net Present Value If a project with conventional 8.1 cash flows has a payback period less than its life, can you definitively state the algebraic sign of the NPV? Why or why not? 8.2 Net Present Value Suppose a project has conventional cash flows and a positive NPV. What do you know about its payback? Its profitability index? Its IRR? Explain.
Essentials of Business Analytics (MindTap Course List)
2nd Edition
ISBN:9781305627734
Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Publisher:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Chapter15: Decision Analysis
Section: Chapter Questions
Problem 23P: In Problem 22, if P(s1) = 0.25, P(s2) = 0.50, and P(s3) = 0.25, find a recommended decision for each...
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What is 8.1
Transcribed Image Text:A has the larger NPV
t, so the NPV and IRR rankings will
Sur decision rule is thus very simple: Take A if the required return
if there's a conflict, we will go with the
is less than 10.61 percent, take B if the required return is between 10.61 percent
and 32.37 percent (the IRR on B), and take neither if the required return is
more than 32.37 percent.
Here we need to calculate the ratio of average net income to average book value to
higher
get the AAR. Average net income is:
Average net income = ($1,000+2,000 +4,000)/3
= $2,333.33
Average book value is:
Average book value = $9,000/2 = $4,500
Se. the average accounting return is:
1
AR=$2,333.33/$4,500 = .5185, or 51.85%
is is an impressive return. Remember, however, that it isn't really a rate of return
ike an interest rate or an IRR, so the size doesn't tell us a lot. In particular, our money
is probably not going to grOW at 51.85 percent per year, sorry to say.
TICAL THINKING AND CONCEPTS REVIEW
Payback Period and Net Present Value If a project with conventional
8.1
cash flows has a payback period less than its life, can you definitively state
the algebraic sign of the NPV? Why or why not?
8.2 Net Present Value Suppose a project has conventional cash flows and a
positive NPV. What do you know about its payback? Its profitability index?
Its IRR? Explain.
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