Answered: which investment(s) should be accepted?

Business

Finance

which investment(s) should be accepted?

Principles of Accounting Volume 1

19th Edition

ISBN:9781947172685

Author:OpenStax

Publisher:OpenStax

Chapter5: Completing The Accounting Cycle

Section: Chapter Questions

Problem 16MC: If current assets are $100,000 and current liabilities are $42,000, what is the working capital? A....

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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

The Emu Manufacturing Company is considering five independent investment opportunities. The required investment outlays and expected internal rates of return (IRR) for these investments are shown below. The firm's cost of capital is 14% and its target optimal capital structure is a debt ratio of 30%. Internally generated funds totalling $900,000 are available for all investment opportunities.

(i) Based on the IRR method, which investment(s) should be accepted?

(ii) If the company were to undertake all acceptable investments, what amount should be paid out in dividends according to the residual dividend policy?

(iii) What would be the amount of external finance required if the company were to undertake all acceptable investments?

Investment
Investment Cost
IRR (%)
A
$275,000
17.5
$325,000
$550,000
$350,000
B
15.7
C
14.3
D
13.2
E
$400,000
11.8

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.

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