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**Unformatted text preview: **Tutorial 7
#1:
Tutorial 7
Suppose7a project has conventional cash flows and a positive NPV. What do you know
Tutorial
about
#1: its payback? Its discounted payback? Its profitability index? Its IRR? Explain.
#1:
Suppose a project has conventional cash flows and a positive NPV. What do you know
Suppose
project has
cash flows
a positiveindex?
NPV. What
do Explain.
you know about its
#2:
about itsapayback?
Itsconventional
discounted payback?
Itsand
profitability
Its IRR?
payback?
discounted
payback?
Its profitability
index? Itsexclusive
IRR? Explain.
Mahjong,ItsInc.,
has identified
the following
two mutually
projects:
#2:
Mahjong, Inc., has identified the following two mutually exclusive projects:
#2:
Year
Cash Flow (A) Cash Flow (B)
Mahjong, Inc., has identified the following two mutually exclusive projects:
0
-$43,000
-$43,000
Year
Cash Flow (A) Cash Flow (B)
1
23,000
7,000
0
-$43,000
-$43,000
2
17,900
13,800
1
23,000
7,000
3
12,400
24,000
2
17,900
13,800
4
9,400
26,000
3
12,400
24,000
26,000 Using the IRR decision rule, which
a. What4 is the IRR for 9,400
each of these projects?
project should the company accept? Is this decision necessarily correct?
a. What
What
the IRR
IRRreturn
for each
each
Using
the
IRR
decision
a.b.
the
for
of these
projects?
Using
IRR
rule, which
project should
If
theisis
required
is 11%,
what
is the NPV
forthe
each
ofdecision
these projects?
Which
project
should
the
company
accept?
Is
this
decision
necessarily
correct?
the
company
accept?
Is
this
decision
necessarily
correct?
project will you choose if you apply the NPV decision rule?
b. IfOver
Ifthe
the required
required
return
is 11%,
11%, what
the NPV
each Project
of these
projects?
b.c.
return
is
theseA?
projects?
what
range
of discount
rates iswould
you for
choose
Project Which
B? Atproject
what will
project
will
you
choose
if
you
apply
the
NPV
decision
rule?
you
choose
if you
apply
decision
rule? these two projects? Explain.
discount
rate
would
youthe
be NPV
indifferent
between
Over what
what range
range of
of discount
discount rates
rates would
would you
At what
what discount
c.c. Over
you choose
choose Project
Project A?
A? Project
Project B?
B? At
discount
you be indifferent
between
two projects?
rate
wouldrate
youwould
be indifferent
between these
twothese
projects?
Explain. Explain.
#3:
#3:
Consider the following two mutually exclusive projects:
#3:
Consider
the following two mutually exclusive projects:
Consider the following two mutually exclusive projects:
Year
Cash Flow (A) Cash Flow (B)
0
-$300,000
Year
Cash
Flow (A) Cash-$40,000
Flow (B)
20,000
19,000
01
-$300,000
-$40,000
50,000
12,000
12
20,000
19,000
50,000
18,000
23
50,000
12,000
34
50,000
18,000
390,000
10,500
4
390,000
10,500
Whichever
project
you
choose,
if
any,
you
requirea 15%
a 15%
return
your
investment.
Whichever project you choose, if any, you require
return
onon
your
investment.
you
apply
payback
criterion,
which
investment
will
choose?
Why?
a.a.
If If
you
apply
thethe
payback
criterion,
investment
will
youyou
choose?
Why?
Whichever
project
you
choose,
if any,which
you
require
a 15%
return
on
your
investment.
apply
the
discounted
payback
criterion,
which
investment
you
choose?
b.b.
you
apply
thethe
discounted
payback
criterion,
which
investment
willwill
youWhy?
choose?
Why?
a.If If
you
apply
payback
criterion,
which
investment
will
you choose?
c.b.If Why?
you
apply
thethe
NPV
criterion,
which criterion,
investment
will you
choose?will
Why?
If
you
apply
discounted
payback
which
investment
you choose?
d.c.If If
you
apply
thethe
IRR
criterion,
which
investment
willwill
you you
choose?
Why?Why?
you
apply
NPV
criterion,
which
investment
choose?
Why?
e.d.
you
apply
the
profitability
index
criterion,
which
investment
will
you
choose? Why?
c.If If
you
apply
the
NPV
criterion,
which
investment
will
you
choose?
Why?
apply the IRR
which investment will you choose?
Why?
If you
IRR criterion,
which(e),
investment
will you
Why?
f.d.Based
onapply
your the
answers
in (a) through
which project
willchoose?
you finally
choose? Why? e. If you apply the profitability index criterion, which investment will you choose?
Why?
f. Based on your answers in (a) through (e), which project will you finally choose?
Why?
#4:#4:
Slow
Ride
Corp.
evaluating
a project
with
following
cash
flows:
Slow
Ride
Corp.
is is
evaluating
a project
with
thethe
following
cash
flows: Year
0
1
2
3
4
5 Cash Flow
-$16,000
6,100
7,800
8,400
6,500
-5,100 The
company
uses
a 10
percent
interest
rate
projects.
Calculate
MIRR
The
company
uses
a 10
percent
interest
rate
onon
allall
ofof
itsits
projects.
Calculate
thethe
MIRR
of of
the
the project
the combination
approach.
project
using using
the combination
approach.
#5:#5:
The
Yurdone
Corporation
wants
a private
cemetery
business.
According
The
Yurdone
Corporation
wants
to to
setset
upup
a private
cemetery
business.
According
to to
thethe
CFO,
CFO,
Deep, business
is “looking
As the
a result,
the cemetery
project
will a net cash
Barry
M.Barry
Deep,M.business
is “looking
up.” As up.”
a result,
cemetery
project will
provide
provide
a net cash
of $85,000
forfirst
the year,
firm during
first
year,are
and
the cashtoflows
inflow
of $85,000
forinflow
the firm
during the
and thethe
cash
flows
projected
grow at a
areofprojected
grow
a rate ofThe
6 percent
year forever.
project requires
an
rate
6 percenttoper
yearatforever.
projectper
requires
an initialThe
investment
of $1,400,000.
investment
of $1,400,000.
a. initial
If Yurdone
requires
a 13% return on such undertakings, should the cemetery business be
started?
If Yurdone
a 13%unsure
returnabout
on such
the cemetery
b. a. The
companyrequires
is somewhat
theundertakings,
assumption ofshould
a 6% growth
rate inbusiness
its cash flows.
started?
Atbewhat
constant growth rate would the company just break even if it still required a 13%
b. return
The company
is somewhat unsure about the assumption of a 6% growth rate in its
on investment?
cash flows. At what constant growth rate would the company just break even if it still
required a 13% return on investment?
#6:
What is the NPV of a publicly listed common stock? Of a bond? Given your answers, would you
#6:
purchase
a common stock and/or a bond?
What is the NPV of a publicly listed common stock? Of a bond? Given your answers,
would you purchase a common stock and/or a bond?
#7:
Joe is considering a project that requires $90,000 for initial investment. The project generates
revenues of $X every year for 6 years. The payback for the project is 4.5 years. The NPV for the
project is $2,457.59. What is the discounted payback for this project? ...

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- Winter '14
- Net Present Value