Tutorial 7 questions - Tutorial 7#1 Tutorial 7 Suppose7a project has conventional cash flows and a positive NPV What do you know Tutorial about#1 its

Tutorial 7 questions - Tutorial 7#1 Tutorial 7 Suppose7a...

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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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