FINANCE 601 ACCESS CODE (CUSTOM)
16th Edition
ISBN: 9781259867668
Author: Ross
Publisher: MCG CUSTOM
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 5, Problem 12QP
Problems with Profitability Index The Cori’s Sausage Corporation is trying to choose between the following two mutually exclusive design projects:
| Year | Cash Flaw (I) | Cash Flow (II) |
| 0 | -$35,000 | - $ 16,000 |
| 1 | 19,800 | 9,400 |
| 2 | 19,800 | 9,400 |
| 3 | 19,800 | 9,400 |
- a. If the required return is 10 percent and the company applies the profitability index decision rule, which project should the firm accept?
- b. If the company applies the
NPV decision rule, which project should it take? - c. Explain why your answers in (a) and (b) are different.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
The Weiland Computer Corporation is trying to choose between the following mutually exclusive design projects, P1 and P2:
Year
0
1
2
3
Cash flows (P1)
-$53,000
27,000
27,000
27,000
Cash flow (P2)
-$16,000
9,100
9,100
9,100
If the discount rate is 10 percent and the company applies the profitability index (PI) decision rule, which project should the firm accept?
If the firm applies the Net Present Value (NPV) decision rule, which project should it take?
Are your answers in (a) and (b) different? Explain why?
The Weiland Computer Corporation is trying to choose between the following mutually exclusive design projects, P1 and P2:Year 0123 Cash flows (P1) -$53,000 27,000 27,000 27,000 Cash flow (P2) -$16,000 9,100 9,100 9,100a. If the discount rate is 10 percent and the company applies the profitability index (PI) decision rule, which project should the firm accept?b. If the firm applies the Net Present Value (NPV) decision rule, which project should it take?c. Are your answers in (a) and (b) different? Explain why?
Year Cash Flow (I) Cash Flow (II)
0 $51,000 $14,400
1 24,800 7,800
2 24,800 7,800
3 24,800 7,800
The Sloan Corporation is trying to choose between the following two mutually exclusive design projects: a. If the required return is 10 percent and the company applies the profitability index decision rule, which project should the firm accept? b. If the company applies the NPV decision rule, which project should it take? c. Explain why your answers in (a) and (b) are different.
Chapter 5 Solutions
FINANCE 601 ACCESS CODE (CUSTOM)
Ch. 5 - Payback Period and Net Present Value If a project...Ch. 5 - Net Present Value Suppose a project has...Ch. 5 - Comparing Investment Criteria Define each of the...Ch. 5 - Payback and Internal Rate of Return A project has...Ch. 5 - International Investment Projects In March 2014,...Ch. 5 - Capital Budgeting Problems What are some of the...Ch. 5 - Prob. 7CQCh. 5 - Prob. 8CQCh. 5 - Net Present Value versus Profitability Index...Ch. 5 - Internal Rate of Return Projects A and B have the...
Ch. 5 - Net Present Value You are evaluating Project A and...Ch. 5 - Modified Internal Rate of Return One of the less...Ch. 5 - Net Present Value It is sometimes stated that the...Ch. 5 - Prob. 14CQCh. 5 - Calculating Payback Period and NPV Maxwell...Ch. 5 - Calculating Payback An investment project provides...Ch. 5 - Calculating Discounted Payback An investment...Ch. 5 - Calculating Discounted Payback An investment...Ch. 5 - Prob. 5QPCh. 5 - Calculating IRR Compute the internal rate of...Ch. 5 - Calculating Profitability Index Bill plans to open...Ch. 5 - Calculating Profitability Index Suppose the...Ch. 5 - Cash Flow Intuition A project has an initial cost...Ch. 5 - Prob. 10QPCh. 5 - NPV versus IRR Consider the following cash flows...Ch. 5 - Problems with Profitability Index The Coris...Ch. 5 - Prob. 13QPCh. 5 - Comparing Investment Criteria Wii Brothers, a game...Ch. 5 - Profitability Index versus NPV Hanmi Group, a...Ch. 5 - Comparing Investment Criteria Consider the...Ch. 5 - Comparing Investment Criteria The treasurer of...Ch. 5 - Comparing Investment Criteria Consider the...Ch. 5 - Prob. 19QPCh. 5 - NPV and Multiple IRRs You are evaluating a project...Ch. 5 - Payback and NPV An investment under consideration...Ch. 5 - Multiple IRRs This problem is useful for testing...Ch. 5 - NPV Valuation The Yurdone Corporation wants to set...Ch. 5 - Calculating IRR The Utah Mining Corporation is set...Ch. 5 - Prob. 25QPCh. 5 - Calculating IRR Consider two streams of cash...Ch. 5 - Calculating Incremental Cash Flows Darin Clay, the...Ch. 5 - Prob. 28QPCh. 5 - Prob. 1MCCh. 5 - Seth Bullock, the owner of Bullock Gold Mining, is...
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
- Scenario Analysis Shao Industries is considering a proposed project for its capital budget. The company estimates the projects NPV is 12 million. This estimate assumes that the economy and market conditions will be average over the next few years. The companys CFO, however, forecasts there is only a 50% chance that the economy will be average. Recognizing this uncertainty, she has also performed the following scenario analysis: What are the projects expected NPV, standard deviation, and coefficient of variation?arrow_forwardInvestment Timing Option: Option Analysis Rework Problem 14-1 using the Black-Scholes model to estimate the value of the option. Assume that the variance of the project’s rate of return is 0.0687 and that the risk-free rate is 8%. 14–1 Investment Timing Option: Decision-Tree Analysis Kim Hotels is interested in developing a new hotel in Seoul. The company estimates that the hotel would require an initial investment of $20 million. Kim expects the hotel will produce positive cash flows of $3 million a year at the end of each of the next 20 years. The project’s cost of capital is 13%. a. What is the project’s net present value? b. Kim expects the cash flows to be $3 million a year, but it recognizes that the cash flows could actually be much higher or lower, depending on whether the Korean government imposes a large hotel tax. One year from now, Kim will know whether the tax will be imposed. There is a 50% chance that the tax will be imposed, in which case the yearly cash flows will be only $2.2 million. At the same time, there is a 50% chance that the tax will not be imposed, in which case the yearly cash flows will be $3.8 million. Kim is deciding whether to proceed with the hotel today or to wait a year to find out whether the tax will be imposed. If Kim waits a year, the initial investment will remain at $20 million. Assume that all cash flows are discounted at 13%. Use decision-tree analysis to determine whether Kim should proceed with the project today or wait a year before deciding.arrow_forwardWallace Company is considering two projects. Their required rate of return is 10%. Which of the two projects, A or B, is better in terms of internal rate of return?arrow_forward
- Residual Distribution Policy Harris Company must set its investment and dividend policies for the coming year. It has three independent projects from which to choose, each of which requires a 3 million investment. These projects have different levels of risk, and therefore different costs of capital. Their projected IRRs and costs of capital are as follows: Project A: Cost of capital = 17%; IRR = 20% Project B: Cost of capital = 13%; IRR = 10% Project C: Cost of capital = 7%; IRR = 9% Harris intends to maintain its 35% debt and 65% common equity capital structure, and its net income is expected to be 4,750,000. If Harris maintains its residual dividend policy (with all distributions in the form of dividends), what will its payout ratio be?arrow_forwardHemmingway, Inc. is considering a $5 million research and development (R&D) project. Profit projections appear promising, but Hemmingway’s president is concerned because the probability that the R&D project will be successful is only 0.50. Furthermore, the president knows that even if the project is successful, it will require that the company build a new production facility at a cost of $20 million in order to manufacture the product. If the facility is built, uncertainty remains about the demand and thus uncertainty about the profit that will be realized. Another option is that if the R&D project is successful, the company could sell the rights to the product for an estimated $25 million. Under this option, the company would not build the $20 million production facility. The decision tree follows. The profit projection for each outcome is shown at the end of the branches. For example, the revenue projection for the high demand outcome is $59 million. However, the cost of the R&D project ($5 million) and the cost of the production facility ($20 million) show the profit of this outcome to be $59 – $5 – $20 = $34 million. Branch probabilities are also shown for the chance events. Analyze the decision tree to determine whether the company should undertake the R&D project. If it does, and if the R&D project is successful, what should the company do? What is the expected value of your strategy? What must the selling price be for the company to consider selling the rights to the product? Develop a risk profile for the optimal strategy.arrow_forwardThe Klingon Sausage Corporation is trying to choose between the following two projects: Year Cash Flow (Project I) Cash Flow (Project II) 0 -$363,000 -$165,000 1 184,800 99,600 2 184,800 99,600 3 184,800 99,600 The discount rate of both projects is 8%. Klingon’s manager believes the company has sufficient resources so that the two projects should not be treated as mutually exclusive. Which project should be taken based on the profitability index? A. Project I should be accepted and project II should be rejected. B. None of the projects should be accepted. C. Project I should be rejected and project II should be accepted. D. Both projects should be accepted.arrow_forward
- The Sloan Corporation is trying to choose between the following two mutually exclusive design projects: Year Cash Flow(I) Cash Flow(II) 0 –$ 55,000 –$ 18,900 1 25,000 10,150 2 25,000 10,150 3 25,000 10,150 a-1 If the required return is 10 percent, what is the profitability index for both projects? (Do not round intermediate calculations. Round your answers to 3 decimal places, e.g., 32.161.) a-2 If the company applies the profitability index decision rule, which project should the firm accept? Project I Project Il b-1 What is the NPV for both projects? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) b-2 If the company applies the NPV decision rule, which project should it take? Project I Project IIarrow_forward5). The HC Corporation is trying to choose between the following two mutually exclusive design projects: Year Cash Flow I (in dollars) Cash Flow II (in dollars) 0 -64, 000 -18,000 1 31, 000 9,700 2 31, 000 9,700 3 31, 000 9,700 a). If the required return is 10%, and the company applies the profitability index decision rule, which project should the firm accept? Why? b). If the company applies the NPV decision rule, which project should it take? Why? c). Explain why your answers in (a) and (b) are different.arrow_forwardA firm evaluates all of its projects by applying the NPV decision rule. A project under consideration has the following cash flows: Year Cash Flow 0 –$ 27,300 1 11,300 2 14,300 3 10,300 What is the NPV for the project if the required return is 10 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) At a required return of 10 percent, should the firm accept this project? multiple choice 1 Yes No What is the NPV for the project if the required return is 26 percent? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) At a required return of 26 percent, should the firm accept this project? multiple choice 2 Yes Noarrow_forward
arrow_back_ios
arrow_forward_ios
Recommended textbooks for you
Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College Pub
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
Survey of Accounting (Accounting I)AccountingISBN:9781305961883Author:Carl WarrenPublisher:Cengage Learning
Managerial Accounting
Accounting
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:South-Western College Pub
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
Survey of Accounting (Accounting I)
Accounting
ISBN:9781305961883
Author:Carl Warren
Publisher:Cengage Learning
Economic Value Added EVA - ACCA APM Revision Lecture; Author: OpenTuition;https://www.youtube.com/watch?v=_3hpcMFHPIU;License: Standard Youtube License