Sketch the NPV profiles for X and Y over a range of discount rates from zero to 25 percent (take 0%, 5%, 10%, 15%, 20%, 25%). Calculate the IRR of the projects. What is the relationship between NPV and IRR for your values?

Sketch the NPV profiles for X and Y over a range of discount rates from zero to 25 percent (take 0%, 5%, 10%, 15%, 20%, 25%). Calculate the IRR of the projects. What is the relationship between NPV and IRR for your values?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 14P

See similar textbooks

Related questions

Q: Consider the following two projects: Year 2 Cash Flow Cash Flow Cash Flow Cash Flow Cash Flow Year 1…

A: NPV (Net Present Value) is one of the important technique of capital budgeting decisions which aims…

Q: Consider the following cash flows on two mutually exclusive projects: Year Project A…

A: NPV is the present value of future cashflows

Q: Consider the following two projects: Projec Year 0 Year 1 Year 2 Year 3 Year 4 Cash Cash Cash Cash…

A: Net Present Value is one of the capital budgeting techniques. It is defined as the difference…

Q: Net Cash Flows and NPVs for different discount rate for projects S and L are given below Net…

A: We will only answer the first three subparts , for the remaining subparts , kindly resubmit the…

Q: Consider the following cash flows: C0=-$42 C1=+$38 C2=+$38 C3=+$38 C4=-$76 a. Which two of…

A: Capital budgeting refers to the evaluation of the profitability of potential investment and projects…

Q: payback

A: Formulas: Payback period = Initial investment/Net annual cash inflows NPV = Cash flows/(1+i)^n -…

Q: 3. The cash flows for three different alternatives are given in table below. If MARR is set at 8%,…

A: We will have to find the incremental cash flows and then determine the present value of these.…

Q: Year Cash Flow 0 -1000 1 800 2 1000 3 1300 4 -2200 Begin by plotting how the NPV of this project…

A: We’ll answer the first question since the exact one wasn’t specified. Please submit a new question…

Q: A project has the following cash flows: Year Cash Flow -$16,100 6,800 8,100 6,600 1 3 What is the…

A: The present value is the value of the sum received at time 0 or the current period. It is the value…

Q: Consider the following two mutually exclusive projects: Second part of the Question Year Cash…

A: The difference between the current value of cash inflows and outflow of cash over a period of time…

Q: Two projects, Y and Z, have the following cash flows: Year Project Y Project Z 0 -500 -1700…

A: Payback(PB) Period shows time in which initial outlay for any proposal is completely recovered from…

Q: Consider the following cash flow: Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8…

A: IRR stands for internal rate of return. When used, it estimates the profitability of potential…

Q: A project has the following cash flows: Year Cash Flow 0 –$ 16,100 1 6,800 2 8,100 3…

A: Capital budgeting techniques and methods are widely used methods and techniques for evaluating the…

Q: Consider the following cash flows on two mutually exclusive projects: Year Project A Project B 0…

A: NPV is defined as the difference between the present value of all the cash outflows and cash inflows…

Q: A project has the following cash flows: Year Cash Flow -$ 18,700 9,400 10,400 6,500 a. What is the…

A: Year Cash flow 0 -18700 1 9400 2 10400 3 6500

Q: Consider the following information relating to the expected cash flows from two independent…

A: Nominal rate = 10% Inflation rate = 4% Real rate = [(1+Nominal rate)/(1+Inflation rate)]-1…

Q: Consider the following two mutually exclusive projects: Year Cashflow (a)…

A: Excel Formulas:

Q: Q8 - Consider the following two mutually exclusive projects: Year Cash Flow (X) Cash…

A: Since we only answer up to 3 sub-parts, we’ll answer the first 3. Please resubmit the question and…

Q: A. Payback. The company requires all projects to payback within 3 years. Calculate the payback…

A: Payback period = Year of last negative cash flow + (Absolute value of last negative cash flow/Next…

Q: Consider the following cash flows: C0=-$42 C1=+$38 C2=+$38 C3=+$38 C4=-$76 a. Which two of the…

A: Internal Rate of Return is the discounting rate where the net present value of the project is zero.…

Q: Consider the following cash flows, for four different projects: (given) (a) Calculate the…

A: Capital budgeting techniques are the methods used to evaluate the profitability of investments in…

Q: Consider the following cash flows on two mutually exclusive projects: Year Project A…

A: Cash flows given for project A are in real terms, so real discount rate should be used to calculate…

Q: Profitability index. Given the discount rate and the future cash flow of each project listed in…

A: PI formula: PI=PV of future cashflowinitial investment

Q: Consider the following two projects: Year 4 Cash Flow Cash Flow Cash Flow Cash Flow Cash Flow N/A…

A: Given: Year Particulars Amount 0 Cash outflows -$73 1 Cash inflows $30 2 Cash inflows $30…

Q: Consider the following two mutually exclusive projects: Cash Flows ($) Project Co C1 C2 C3 C4 C5 -50…

A: The internal rate of return(IRR) is the rate at which the present value of future cash flow is equal…

Q: Consider the following two projects: Project Year o Year 1 Year 2 Year 3 Year 4 Discount Cash Flow…

A: Net present value (NPV) is the difference between the present value of cash inflows and the present…

Q: Net Cash Flows and NPVs for different discount rate for projects S and L are given below Net…

A: NPV is the net current worth of cash flows that are expected to occur in the future. It is…

Q: Net Cash Flows and NPVs for different discount rate for projects S and L are given below Net…

A: “Hey, since your question has multiple sub-parts, we will solve first three sub-parts for you. If…

Q: Project Y has following cash flows: C0 = -800, C1 = +6,000, and C2 = -6,000. Calculate the IRRs for…

A: Year Cash Flow 0 -800 1 6,000 2 -6,000

Q: Comparison of NPV and IRR: The Case of Mutually Exclusive Projects Estimated cashflow data for each…

A: Independent investments are those that do not affect one another whereas the mutually exclusive…

Q: Net Cash Flows and NPVs for different discount rate for projects S and L are given below Net…

A: NPVs @10% is 161.33. It is given in the question itself.

Q: McCann Co. has identified an investment project with the following cash flows. Year Cash Flow…

A: a. If the discount rate is 10 percent, what is the present value of these cash flows? Discount rate…

Q: A potential project provides the following: Initial Investment = 36,101 Annual cash Flows =…

A: Internal rate of return will be providing the percentage value of the project's profitability. The…

Q: A project has the following cash flows: Cash Flow Year 16,300 1 7,000 8,300 6,800 2 3 a. What is the…

A: Year Cash flow 0 -16300 1 7000 2 8300 3 6800

Q: Consider the following two projects: Project Year 0 Year 1 Year 2 Year 3 Year 4 Discount Cash Flow…

A: YEAR CASHFLOWS DISCOUNT FACTOR DISCOUNTED CASHFLOWS 0 73 1 30 0.909 27.27 2 30 0.826…

Q: A project’s cash flows are listed below. Assume the appropriate discount rate for this project is…

A: Given:

Q: Net Cash Flows and NPVs for different discount rate for projects S and L are given below Net…

A: IRR is the rate at which NPV of the project is equal to zero that means total PV of cash inflows…

Q: Cash Flows and NPVs for different discount rate for projects S and L are given below Net Cash…

A: independednt projects are one which are not dependent on each other.1.now for to find which project…

Q: At what discount rate does the following project have a positive NPV of exactly $1,000? Time 0…

A: Given: NPV = $1,000 Initial investment = -$10,000 Year 1- 7 cash flows = $2,500

Q: Consider the following information relating to the expected cash flows from two independent…

Q: Consider the following two projects: Project Year 0 Year 1 Year 2 Year 3 Year 4 Discount Cash Flow…

A: Payback period for Project A can be calculated as below: Here, A = Last period or year in which the…

Q: Compute the internal rate of return for the cash flows of the following two projects: (Do not round…

A: Let us assume IRR lies between 10% and 20% rate of return. Therefore, NPV at discount rate of 10%…

Concept explainers

Present Value

Present value (PV) is defined as the current or present value of all future sums of cash flow or money at a specified rate of return. This rate of return is known as the discounted rate, which is essentially the interest rate, discounted over some time. The expected cash flows are discounted at a discount rate to compute the present value. The higher the discount rate, the higher the future value (FV), but the lower the present value.

Question

Consider the following two mutually exclusive projects:

Year	Cash Flow (X)	Cash Flow (Y)
0	-24,063	-24,063
1	10,320	12,063
2	10,900	9,360
3	10,800	10,400

Sketch the NPV profiles for X and Y over a range of discount rates from zero to 25 percent (take 0%, 5%, 10%, 15%, 20%, 25%).
Calculate the IRR of the projects.
What is the relationship between NPV and IRR for your values?
What is the crossover rate for these two projects and what it indicates for your values?

Note - answer all the parts of the question.

Definition Definition Discount rate of a project wherein its net present value equals zero. Internal rate of return equates the present value of future cash flows with the initial investments. Internal rate of return helps to determine nominal cash flows.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1

Step 2

Step 3

Step 4

Step 5

Step 6

Trending now

This is a popular solution!

Step by step

Solved in 6 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

Define each of the following terms: Capital budgeting; payback period; discounted payback period Independent projects; mutually exclusive projects Net present value (NPV) method; internal rate of return (IRR) method; profitability index (PI) Modified internal rate of return (MIRR) method NPV profile; crossover rate Nonnormal cash flow projects; normal cash flow projects; multiple IRRs Reinvestment rate assumption Replacement chain; economic life; capital rationing; equivalent annual annuity (EAA)
Project Y cost $8,000 and will generate net cash inflows of $1,500 in year one, $2,000 in year two, $2,500 in year three, $3,000 in year four and $2,000 in year five. What is the NPV using 8% as the discount rate?
A project has the following cash flows set out below. What is the profitability index of this project if the relevant discount rate is 2 percent? Enter your final answer to two decimal places. Year Cash flow 0 -1,745 1 537 2 2,066 3 3,912
Net Cash Flows and NPVs for different discount rate for projects S and L are given below Net Cash Flows ($) Discount Rate (%) NPVS NPVL Year (t) Project S Project L 0% $800 $1100 0 $(3000) $(3000) 5 554.32 1 1500 400 10 161.33 2 1200 900 15 (90.74) (259.24) 3 800 1300 20 (309.03) (565.97) 4 300 1500 ii) NPVS at 10%: d) What is the IRR for S? (Write down the equation for IRR and then Use an excel worksheet to calculate IRR Equation: Answer:
Calculate/estimate the IRR(s) for a 6-year project with the following cash flows: CF0 = -50, CF1 =28 = CF2 = CF3 = CF4 = CF5, and CF6 = -93. In Excel, plot the NPV (= Y axis) against r (= discountrate), using r = 0%, 2%, and so on until you find all IRRs in the chart. Identify/estimate all IRRs.
Project Y has following cash flows: C0 = -800, C1 = +6,000, and C2 = -6,000. Calculate the IRRs for the project: For what range of discount rates does the project have positive NPV (Plot a graph with NPV on the vertical axis and discount rate on the horizontal axis).
Net Cash Flows and NPVs for different discount rate for projects S and L are given below Net Cash Flows ($) Discount Rate (%) NPVS NPVL Year (t) Project S Project L 0% $800 $1100 0 $(3000) $(3000) 5 554.32 1 1500 400 10 161.33 2 1200 900 15 (90.74) (259.24) 3 800 1300 20 (309.03) (565.97) 4 300 1500 e) What is the IRR for L? (Write down the equation for IRR and then Use an excel worksheet to calculate IRR Equation: Answer: f) What is the cross-over rate? (Write down the equation for IRR and then Use an excel worksheet to calculate IRR Equation: ANSMER:
You are considering an investment project with the cash flows of -300 (the initial cash flow), 800 (cash flow at year 1), -200 (cash flow at year 2). Given the discount rate of 10%, compute the Modified Internal Rate of Return (MIRR) using the discountingapproach. 19.72% 71.94% 37.52% 50.55%
Consider the following two mutually exclusive projects: Second part of the Question Year Cash Flow(X) Cash Flow(Y) 0 –$ 19,900 –$ 19,900 1 8,825 10,050 2 9,050 7,775 3 8,775 8,675 d) At which range of discount rates would you choose Project X over Project Y? e) At which range of discount rates would you choose Project Y over Project X?
Arya Co. is considering the following two independent projects. The cash flows for Project A are expressed in nominal terms, while Project B's are expressed in real terms. The appropriate nominal discount rate is 11%, and the inflation rate is 5%. Using the exact Fisher equation, calculate net present value for Project A. (Round to 2 decimals) Year Project A Project B 0 -160,000 -109,000 1 60,000 40,000 2 60,000 40,000 3 60,000 40,000 4 60,000 40,000 5 60,000 40,000
If the cash flows for Project M are C0 = -1,000; C1 = +800; C2 = +700 and C3= -200. Calculate the IRR for the project. For what range of discount rates does the project have a positive NPV?
Piercy, LLC, has identified the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 -$56,000 -$56000 1 32,000 19,400 2 26,000 23,400 3 19,000 28,000 4 13,200 25,400 Over what range of Discount rates would you choose Project A? Project B? (Please list percentages rounded to 2 decimal places. Hint: The answer is not the same as the IRR.) Project A ____________% Project B ____________% At what discount rate would you be indifferent between these two projects? ____________%