a.
Adequate information:
The initial cost = I
Required return = r
Annual cash flow = C
Number of years = N.
To compute: The annual cash flow for which the payback period is equal to the life of the project.
Introduction: The payback period is the minimum period of time in which an initial investment of the project is recovered from the net
b.
Adequate information:
Initial cost = I
Required return = r
Annual cash flow = C
Number of years = N.
To compute: The value at which the company will have a positive NPV.
Introduction:
c.
Adequate information:
Initial cost = I
Required return = r
Annual cash flow = C
Number of years = N.
To compute: The annual cash flow when the benefit-cost ratio is 2.
Introduction: The benefit-cost ratio or the profitability index is defined as the ratio between the present worth of future cash inflows of a particular investment and the initial cost of the investment.
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Chapter 5 Solutions
CORPORATE FINANCE- ACCESS >C<
- 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_forwardWhich of the following comes closest to the net present value (NPV) of a project whose initial investment is $5 and which produces two cash flows: the first at the end of year 2 of $3 and the second at the end of year 4 of $7? The required rate of return is 13%? Select one: a. $1.84 b. $0 c. $1.64 d. $2.05 e. $2.26arrow_forwardA project has an initial cash outflow followed by three annual positive cash inflows and has a payback period of two years. What is the validity of the following statements? (1) The project always has a unique Internal Rate of Return (IRR) (2) If the Internal Rate of Return (IRR) is less than the cost of capital then the project has a positive Net Present Value (NPV) at the cost of capital Statement (1) Statement (2) True True True False False True 4. False Falsearrow_forward
- A firm evaluates all of its projects by applying the NPV decision rule. A project under consideration has the following cash flows: Year Cash Flow 0 –$ 28,900 1 12,900 2 15,900 3 11,900 What is the NPV for the project if the required return is 11 percent? At a required return of 11 percent, should the firm accept this project? What is the NPV for the project if the required return is 25 percent?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_forwardConsider the following cash flow profile and assume MARR is 10%/yr. Solve, a. What does Descartes’ rule of signs tell us about the IRR(s) of this project? b. What does Norstrom’s criterion tell us about the IRR(s) of this project? c. Determine the IRR(s) for this project. d. Is this project economically attractive?arrow_forward
- Consider the cash flows for the following investment projects: (a) For Project A. find the value of X that makes the equivalent annual receiptsequal the equivalent annual disbursement at i = 13%.(b) Would you accept Project Bat i = 15% based on the AE criterion?arrow_forwarda. What are the project’s annual net cash inflows? b. What is the present value of the project’s annual net cash inflows? (Round your final answer to the nearest whole dollar amount.) c. What is the project’s net present value? (Round final answer to the nearest whole dollar amount.) d. What is the profitability index for this project? (Round your answer to 2 decimal places.) e. What is the project’s internal rate of return? (Round your answer to nearest whole percent.)arrow_forwardInvestment Criteria. Consider the following information. Expected Net Cash Flows Year Project X 0 ($10,000) 1 6,500 2 3,500 3 3,000 4 1,000 Assume the discount rate is 10 percent. Calculate Project X’s discounted payback period. Should the project be accepted Calculate the profitability index. Should the project be accepted? Calculate the accounting rate of return. Should the project be accepted?arrow_forward
- If a project has a positive net present value, then which of the following statements are correct? I. The present value of all cash inflows must equal the costs of the project. The IRR is equal to the required rate of return. II. A increase in the project's initial cost will cause the project to have a higher positive NPV. III. Any delay in receiving the projected cash inflows will cause the project to have a higher positive NPV. IV. IRR must equal zero. Only II Only III All None of themarrow_forward7. The NPV and payback period What information does the payback period provide? Suppose you are evaluating a project with the expected future cash inflows shown in the following table. Your boss has asked you to calculate the project’s net present value (NPV). You don’t know the project’s initial cost, but you do know the project’s regular, or conventional, payback period is 2.50 years. Year Cash Flow Year 1 $375,000 Year 2 $475,000 Year 3 $500,000 Year 4 $400,000 If the project’s weighted average cost of capital (WACC) is 8%, the project’s NPV (rounded to the nearest dollar) is: $345,386 $328,117 $414,463 $362,655arrow_forward7. The NPV and payback period What information does the payback period provide? Suppose you are evaluating a project with the expected future cash inflows shown in the following table. Your boss has asked you to calculate the project's net present value (NPV). You don't know the project's initial cost, but you do know the project's regular, or conventional, payback period is 2.50 years. Year Year 1 Year 2 Year 3 Year 4 If the project's weighted average cost of capital (WACC) is 10%, the project's NPV (rounded to the nearest dollar) is: O O Cash Flow $325,000 $475,000 $425,000 $475,000 0 0 $351,183 $367,146 Which of the following statements indicate a disadvantage of using the regular payback period (not the discounted payback period) for capital budgeting decisions? Check all that apply. $319,257 $303,294 The payback period is calculated using net income instead of cash flows. The payback period does not take the project's entire life into account. The payback period does not take the…arrow_forward
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