Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
15th Edition
ISBN: 9780134476315
Author: Chad J. Zutter, Scott B. Smart
Publisher: PEARSON
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Chapter 10, Problem 10.14P
Summary Introduction
To determine:
The
Introduction:
Internal Rate of Return is a measure used in the capital budgeting which estimates the profitability of potential investments. IRR is computed as a discount rate that makes the
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Internal rate of return For the project shown in the following table, calculate the internal rate of return (IRR). Then indicate, for the project, the maximum cost of capital that the firm could have and still find the IRR acceptable.
Consider the relationship between a project’s net present value (NPV), its internal rate of return (IRR), and a company’s cost of capital. For each scenario that follows, indicate the relative value of the unknown. If cost of capital is unknown, indicate whether it would be higher or lower than the stated IRR. If NPV is unknown, indicate whether it would be higher or lower than zero. Project 1 is shown as an example.
A. Calculate the payback period for each project and identify the project in which the company should invest, giving one reason for your choice.
B. Calculate the accounting rate of return on initial capital for each project.
Chapter 10 Solutions
Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
Ch. 10.1 - What is the financial managers goal in selecting...Ch. 10.2 - What is the payback period? How is it calculated?Ch. 10.2 - What weaknesses are commonly associated with the...Ch. 10.3 - How is the net present value (NPV) calculated for...Ch. 10.3 - Prob. 10.5RQCh. 10.3 - Prob. 10.6RQCh. 10.4 - Prob. 10.8RQCh. 10.4 - Prob. 10.9RQCh. 10.4 - Prob. 10.10RQCh. 10.5 - How is a net present value profile used to compare...
Ch. 10.5 - Prob. 10.13RQCh. 10 - Prob. 1ORCh. 10 - All techniques with NPV profile: Mutually...Ch. 10 - Elysian Fields Inc. uses a maximum payback period...Ch. 10 - Prob. E10.1WUECh. 10 - Prob. 10.2WUECh. 10 - Prob. E10.2WUECh. 10 - Axis Corp. is considering investment in the best...Ch. 10 - Prob. E10.3WUECh. 10 - Prob. 10.4WUECh. 10 - Prob. E10.4WUECh. 10 - Cooper Electronics uses NPV profiles to visually...Ch. 10 - Prob. E10.5WUECh. 10 - Payback period The Ball Shoe Company is...Ch. 10 - Payback comparisons Nova Products has a 5-year...Ch. 10 - Prob. 10.3PCh. 10 - Long-term investment decision, payback method Bill...Ch. 10 - Prob. 10.5PCh. 10 - Prob. 10.6PCh. 10 - Prob. 10.7PCh. 10 - Prob. 10.8PCh. 10 - Prob. 10.9PCh. 10 - Prob. 10.10PCh. 10 - Prob. 10.11PCh. 10 - Prob. 10.12PCh. 10 - NPV and EVA A project costs 2,500,000 up front and...Ch. 10 - Prob. 10.14PCh. 10 - Prob. 10.15PCh. 10 - Prob. 10.16PCh. 10 - Prob. 10.17PCh. 10 - Prob. 10.18PCh. 10 - Prob. 10.19PCh. 10 - Prob. 10.20PCh. 10 - Prob. 10.21PCh. 10 - Prob. 10.22PCh. 10 - Prob. 10.23PCh. 10 - Prob. 10.24PCh. 10 - All techniques with NPV profile: Mutually...Ch. 10 - Integrative: Multiple IRRs Froogle Enterprises is...Ch. 10 - Integrative: Conflicting Rankings The High-Flying...Ch. 10 - Problems with IRR White Rock Services Inc. has an...Ch. 10 - ETHICS PROBLEM Diane Dennison is a financial...Ch. 10 - Spreadsheet Exercise The Drillago Company is...
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- Calculate the cash flows for each year. Based on these cash flows and the average project cost of capital, what are the projects NPV, IRR, MIRR, PI, payback, and discounted payback? Do these indicators suggest that the project should be undertaken?arrow_forwardCalculate the project cash flows for each year. Based on these cash flows and the average project cost of capital, what are the projects NPV, IRR, MIRR, PI, payback, and discounted payback? Do these indicators suggest that the project should be undertaken?arrow_forwardWhat are the internal rates of return (IRR) on the three projects? Does the IRR rule in this case give the same decision as NPV? How do you know? If the opportunity cost of capital is 11%, what is the profitability index for each project? Please analyze if, in general, decisions based on profitability index are consistent with decisions based on NPV. What is the most generally accepted measure to choose between the projects? Please justify your answer.arrow_forward
- The internal rate of return (IRR) on a project is the average annual rate of return provided by investing in the project. A. Explain this thoroughly. B. Give some example if you have any idea.arrow_forwardThe cost of capital represents a. the capital outlay required in a project. b. the initial investment of a project. c. the IRR of the investment. d. the minimum ROI of the investment.arrow_forwardIf a capital project has a hurdle rate higher than its internal rate, then its profitability index isarrow_forward
- Using accounting rate of return to make capital investment decisions Carter Company is considering three investment opportunities with the following accounting rates of return: Use the decision rule for ARR to rank the projects from most desirable to least desirable. Carter Company’s required rate of return is 8%.arrow_forwardWhat are the internal rates of return (IRR) on the three projects? Does the IRR rule in this case give the same decision as NPV? How do you know? If the opportunity cost of capital is 11%, what is the profitability index for each project? Please analyze if, in general, decisions based on the profitability index are consistent with decisions based on NPV. What is the most generally accepted measure to choose between the projects? Please justify your answer. Project A -5000 +1000 +1000 +3000 0 B -1000 0 +1000 +2000 +3000 C -5000 +1000 +1000 +3000 +5000 I will need full analysis (qualitative examples and references citations and examples of relative current investments of big companies.arrow_forwardUse the information provided to answer the questions Calculate the Accounting Rate of Return (on average investment) of Project B (expressed to twodecimal places).Calculate the Net Present Value of each project (with amounts rounded off to the nearest Rand). Use your answers from previous question to recommend the project that should be chosen. Motivateyour choice.arrow_forward
- The cost of capital is: the required rate of return for new projects that have risk that is similar to that of the overall firm. the rate of return a firm earns on its investments to satisfy the required rate of return for the firm’s investors. the opportunity cost of using funds on projects. all of the above.arrow_forwardWhat is a capital budgeting technique that generates decision rules and associated metrics for choosing projects, based on the implicit, expected geometric average of a project's rate of return?arrow_forwardConsider the following sets of investment projects: (a) Classify each project as either simple or nonsimple.(b) Compute the i* for Project A, using the quadratic equation.(c) Obtain the rate(s) of return for each project by plotting the PW as a function of interest rate.arrow_forward
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