You have the following set of CFs for an investment: 6. Today -20 1 4 years -25 2 years year 42C years a. Compute the NPV for discount rates of 5%, 10%, 90% and 95%. Estimate IRR for this investment. 1 1 b.- The benchmark rate of return for IRR for your firm is 20%. Without any more calculations, do you have enough information to determine if this is a good investment? If so, determine if the investment is good or bad and explain your answer. If there is not enough information to determine if this is a good investment, explain why not and state the information that you would need in order to determine if this is a good investment.' 1

You have the following set of CFs for an investment: 6. Today -20 1 4 years -25 2 years year 42C years a. Compute the NPV for discount rates of 5%, 10%, 90% and 95%. Estimate IRR for this investment. 1 1 b.- The benchmark rate of return for IRR for your firm is 20%. Without any more calculations, do you have enough information to determine if this is a good investment? If so, determine if the investment is good or bad and explain your answer. If there is not enough information to determine if this is a good investment, explain why not and state the information that you would need in order to determine if this is a good investment.' 1

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 5PB: Mason, Inc., is considering the purchase of a patent that has a cost of $85000 and an estimated...

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Fenton, Inc., has established a new strategic plan that calls for new capital investment. The company has a 9.8% required rate of return and an 8.3% cost of capital. Fenton currently has a return of 10% on its other investments. The proposed new investments have equal annual cash inflows expected. Management used a screening procedure of calculating a payback period for potential investments and annual cash flows, and the IRR for the 7 possible investments are displayed in image. Each investment has a 6-year expected useful life and no salvage value. A. Identify which project(s) is/are unacceptable and briefly state the conceptual justification as to why each of your choices is unacceptable. B. Assume Fenton has $330,000 available to spend. Which remaining projects should Fenton invest in and in what order? C. If Fenton was not limited to a spending amount, should they invest in all of the projects given the company is evaluated using return on investment?
Falkland, Inc., is considering the purchase of a patent that has a cost of $50,000 and an estimated revenue producing life of 4 years. Falkland has a cost of capital of 8%. The patent is expected to generate the following amounts of annual income and cash flows: A. What is the NPV of the investment? B. What happens if the required rate of return increases?
Redbird Company is considering a project with an initial investment of $265,000 in new equipment that will yield annual net cash flows of $45,800 each year over its seven-year life. The companys minimum required rate of return is 8%. What is the internal rate of return? Should Redbird accept the project based on IRR?
Mason, Inc., is considering the purchase of a patent that has a cost of $85000 and an estimated revenue producing lite of 4 years. Mason has a required rate of return that is 12% and a cost of capital of 11%. The patent is expected to generate the following amounts of annual income and cash flows: A. What is the NPV of the investment? B. What happens if the required rate of return increases?
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?
Assume that an investment of 100,000 produces a net cash flow of 60,000 per year for two years. The discount factor for year 1 is 0.89 and for year 2 is 0.80. The NPV is a. 0 b. 6,800 c. 1,400 d. (4,000)
What makes for a good investment? Use the approximate yield formula or a financial calculator to rank the following investments according to their expected returns. Buy a stock for $30 a share, hold it for three years, and then sell it for $60 a share (the stock pays annual dividends of $2 a share). Buy a security for $40, hold it for two years, and then sell it for $100 (current income on this security is zero). Buy a one-year, 5 percent note for $1,000 (assume that the note has a $1,000 par value and that it will be held to maturity).
Giorgio Co. is looking at an investment project with an internal rate of return of 10.8%. The initial outlay for the investment is $90,000. The hurdle rate or minimum acceptable rate of return is 10.2%.
The HUT is evaluating a 5 year investment projected to yield the following relevant cash flows over its 5 year life: Given that the firm employs a 12% discount rate, what is the value of each of the three criteria: NPV? Profitability Index? Payback Period? V
ABC Company is using net present value analysis at various discount rates in order to determine the internal rate of return of an investment proposal. NPV using a discount rate of 12 percent = $2,095 NPV using a discount rate of 14 percent = $(2,108) By interpolating these results, an approximate internal rate of return on the investment is estimated to be percent. (Round your answer to the nearest whole percentage.)
Can you please answer these follow up questions from the above question: d) Suppose the Internal Rate of Return (IRR) of this investment opportunity is 15%. Based on this information alone, should Limitless Ltd. make the investment? Why?Would this decision be consistent with that from B? Explain your reasoning.e) Suppose that, instead of paying the initial £500,000 now, Limitless Ltd. decides to pay it in equal instalments over the next 10 years. How much would the companyneed to pay each year to make all these payments equivalent to £500,000 today?