Exercise 10-10A (Algo) Using the internal rate of return to compare investment opportunities LO 10-3Velma and Keota (V&K) is a partnership that owns a small company. It is considering two alternative investment opportunitles. The firstInvestment opportunity will have a five-year useful life, will cost $9,869.02, and will generate expected cash inflows of $3,300 per year.The second investment is expected to have a useful life of three years, will cost $8,703.98, and will generate expected cash inflows of$3.500 per year. Assume that V&K has the funds available to accept only one of the opportunities. (PV.of $1 and PVA of $1) (Useappropriate factor(s) from the tables provided.)Requiredo. Calculate the internal rate of return of each investment opportunity. (Do not round intermediate calculations.)b. Based on the internal rates of return, which opportunity should V&K select?Internal Rate of Returna First investmentSecond investmontbV&K should select the

Internal Rate of Return(IRR) is one of the capital budgeting techniques used for finding the…

Answered: Calculate the internal rate of return…

Fundamentals of Financial Management (MindTap Course List)

15th Edition

ISBN:9781337395250

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter11: The Basics Of Capital Budgeting

Section: Chapter Questions

Problem 15P: NPV PROFILES: TIMING DIFFERENCES An oil-drilling company must choose between two mutually exclusive...

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NPV PROFILES: TIMING DIFFERENCES An oil-drilling company must choose between two mutually exclusive extraction projects, and each costs 12 million. Under Plan A, all the oil would be extracted in 1 year, producing a cash flow at t = 1 of 14.4 million. Under Plan B, cash flows would be 2.1 million per year for 20 years. The firms WACC is 12%. a. Construct NPV profiles for Plans A and B, identify each projects IRR, and show the approximate crossover rate. b. Is it logical to assume that the firm would take on all available independent, average-risk projects with returns greater than 12%? If all available projects with returns greater than 12% have been undertaken, does this mean that cash flows from past investments have an opportunity cost of only 12% because all the company can do with these cash flows is to replace money that has a cost of 12%? Does this imply that the WACC is the correct reinvestment rate assumption for a projects cash flows? Why or why not?
Capital rationing decision for a service company involving four proposals Clearcast Communications Inc. is considering allocating a limited amount of capital investment funds among four proposals. The amount of proposed investment, estimated income from operations, and net cash flow for each proposal are as follows: The companys capital rationing policy requires a maximum cash payback period of three yean. In addition, a minimum average rate of return of 12% is required on all projects. If the preceding standards are mil, the net present value method and present value indexes are used to rank the remaining proposals. Instructions 1. Compute the cash payback period for each of the four proposals. 2. Giving effect to straight-line depreciation on the investments and assuming no estimated residual value, compute the average rate of return for each of the four proposals. (Round to one decimal place.) 3. Using the following formal, summarize the results of your computations in parts (l) and (2). By placing the calculated amounts in the first two columns on the left and by placing a check mark in the appropriate column to the right, indicate which proposals should he accepted for further analysis and which should be rejected. 4. For the proposals accepted for further analysts in part (3), compute the net present value. Use a rate of 12% and the present value of 1 table appearing in this chapter (Exhibit 2). 5. Compute the present value index for each of the proposals in part (4). (Round to two decimal places.) 6. Rank the proposals from most attractive to least attractive, based on the present values of net cash flows computed in part (4). 7. Rank the proposals from most attractive to least attractive, based on the present value indexes computed in part (5). 8. Based on the analyses, comment on the relative attractiveness of the proposals ranked in parts (6) and (7).

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Calculate the internal rate of return of each investment opportunity. Daced