Principles of Corporate Finance
13th Edition
ISBN: 9781260465099
Author: BREALEY, Richard
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Textbook Question
Chapter 5, Problem 15PS
Profitability index Look again at projects D and E in Section 5-3. Assume that the projects are mutually exclusive and that the
- a. Calculate the profitability index for each project.
- b. Show how the profitability-index rule can be used to select the superior project.
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(question3 c,d)
c) Calculate the profitability index (PI) for each project d) Calculate the internal rate of return (IRR) for each project.
QUESTION 5
Invest in any or all of the four projects whose relevant cash flows are given in the following table.
The firm has RM7,000,000 budgeted to fund these projects, all of which are known to be
acceptable. Initial investment for each project is the same for all projects which is RM1,600,000.
The rate of return for all projects is equivalent to 8%.
Operating cash outflow
Project X
Year 1
Project Y
Cash Outflow
RM1,600,000 (for each project)
Operating Cash Inflows
RM
440,000
RM
140,000
1
340,000
220,000
(110,000)
( 95,000 )
105,000
220,000
388,000
180,000
250,000
260,000
370,000
460,000
3.
4.
5.
6.
7.
8.
9.
Use this table for PROJECT X and Y
Period
PVIF 8%
1
0.9259
2
0.8573
3
0.7938
4
0.7350
0.6806
6
0.6302
7
0.5835
8
0.5403
9
0.5002
10
0.4632
8
1. Is Shaylee able to invest in all of these projects simultaneously?
2-A. Calculate the profitability index for each project.
2-B. What is Shaylee’s order of preference based on the profitability index?
Chapter 5 Solutions
Principles of Corporate Finance
Ch. 5 - (IRR) Check the IRRs for project F in Section 5-3.Ch. 5 - (IRR) What is the IRR of a project with the...Ch. 5 - (XIRR) What is the IRR of a project with the...Ch. 5 - Payback a. What is the payback period on each of...Ch. 5 - Payback Consider the following projects: a. If the...Ch. 5 - Prob. 3PSCh. 5 - IRR Write down the equation defining a projects...Ch. 5 - Prob. 5PSCh. 5 - IRR Calculate the IRR (or IRRs) for the following...Ch. 5 - IRR rule You have the chance to participate in a...
Ch. 5 - IRR rule Consider a project with the following...Ch. 5 - IRR rule Consider projects Alpha and Beta: The...Ch. 5 - IRR rule Consider the following two mutually...Ch. 5 - IRR rule Mr. Cyrus Clops, the president of Giant...Ch. 5 - Prob. 12PSCh. 5 - Investment criteria Consider the following two...Ch. 5 - Profitability index Look again at projects D and E...Ch. 5 - Capital rationing Suppose you have the following...Ch. 5 - Prob. 17PSCh. 5 - Prob. 18PS
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- 1. Compute the project profitability index for each project. 2. In order of preference, rank the four projects in terms of net present value, project profitability index and internal rate of return.arrow_forwardAccording to the profitability index criterion, a project is acceptable if its profitability index is greater than ____. a. 0 b. 1.1 c. or equal to 1 d. 1 plus the cost of capitalarrow_forwardProfitability index. Given the discount rate and the future cash flow of each project listed in the following table, , use the PI to determine which projects the company should accept. ..... What is the Pl of project A? (Round to two decimal places.)arrow_forward
- i) Calculate the profitability index of each projectarrow_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_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_forward
- (a)Evaluate the projects using each of the following criteria, stating which project(s) Insignia Corporation Limited should choose under each criteria and why: Payback Discounted Payback Net Present Value Profitability Indexarrow_forward(a) Calculate the payback period for each project. (b) Calculate the net present value (NPV) for each project. (c) Calculate the profitability index of each project. (d) Explain to the company which project should be implemented. Support your answer.arrow_forwardInternal rate of return and modified internal rate of return For the project shown in the following table,, calculate the internal rate of return (IRR) and modified internal rate of return (MIRR). If the cost of capital is 12.13%, indicate whether the project is acceptable according to IRR and MIRR. The project's IRR is %. (Round to two decimal places.) Data table (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) Initial investment (CF) Year (t) 1 2 3 4 5 Print $70,000 Cash inflows (CFt) $15,000 $25,000 $25,000 $15,000 $10,000 Done Xarrow_forward
- Which of the following statement is correct Select one: a. A project is accepted when profitability index will be greater than one b. All statements are correct c. A project is accepted when net present value is greater than zero d. A project is accepted when payback period is less than the other projectarrow_forwardCompute the Profitability Index (PI) for each project? Project A Project B Profitability Index (PI) 5- In light of your answers above, suppose that these two projects might be mutually exclusive or independent. According to these two assumptions, fill in the blanks in the table below with the suitable answer: Points Investment Criteria If A and B are mutually exclusive, then I would select If A and B are independent, then I would select PBP NPV IRR PIarrow_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
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