Consider the below three investment projects generating cash flows as follows: Project 1 2 3 4 A 1,000,000 550,000 750,000 -500,000 -500,000 -500,000 -500,000 -500,000 -500,000 -500,000 -500,000 -500,000 B 1,000,000 1,000,000 C Assume that the cost of capital is 10%. Use this cost of capital to discount (or inflate) all negative cash flows to the present time and all positive cash flows to period 1 in the below table. Then, calculate the IRR based on the cash flows of period 0 and 1. Project A 1 IRR B Using the above modified IRR, make investment decision for each project. Dose the modified IRR deliver correct decisions?

Consider the below three investment projects generating cash flows as follows: Project 1 2 3 4 A 1,000,000 550,000 750,000 -500,000 -500,000 -500,000 -500,000 -500,000 -500,000 -500,000 -500,000 -500,000 B 1,000,000 1,000,000 C Assume that the cost of capital is 10%. Use this cost of capital to discount (or inflate) all negative cash flows to the present time and all positive cash flows to period 1 in the below table. Then, calculate the IRR based on the cash flows of period 0 and 1. Project A 1 IRR B Using the above modified IRR, make investment decision for each project. Dose the modified IRR deliver correct decisions?

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 13E: Buena Vision Clinic is considering an investment that requires an outlay of 600,000 and promises a...

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Buena Vision Clinic is considering an investment that requires an outlay of 600,000 and promises a net cash inflow one year from now of 810,000. Assume the cost of capital is 10 percent. Required: 1. Break the 810,000 future cash inflow into three components: a. The return of the original investment b. The cost of capital c. The profit earned on the investment 2. Now, compute the present value of the profit earned on the investment. 3. Compute the NPV of the investment. Compare this with the present value of the profit computed in Requirement 2. What does this tell you about the meaning of NPV?
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