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Homework_2 - investment and the Payback Period(PP Based...

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FIN340 HOMEWORK #2 INVESTMENT DETECTIVE This homework assignment is based on the Darden Case called “Investment Detective.” The purpose of this Darden Case is to practice estimating the value created from taking on different projects and how those values change given differences in rates of return and project duration. You will look at different ways of evaluating capital budgeting decisions and learn why Net Present Value (NPV) generates better investment decisions than the other competing methods we discussed in Class 6. For solving this assignment, you can ignore the questions provided by the Darden Case that is included in you course packet. Please focus only on answering the following six questions. 1. For each set of project cash flows, calculate the Return on Investment (ROI), which is the excess of cash flow over initial investment divided by the initial
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Unformatted text preview: investment, and the Payback Period (PP). Based upon these two investment criteria, rank the projects in descending order (from best to worst). 2. For each set of project cash flows, calculate the Internal Rate of Return (IRR). Based upon this investment criterion, rank again the projects (from best to worst). 3. For each set of project cash flows, calculate the Net Present Value (NPV), using discount rates of 8%, 10%, and 12%. For each discount rate, rank the projects. 4. Why do the NPV rankings change as the discount rate increases? 5. Why does the ranking from the IRR calculations differ from the NPV rankings? 6. If the projects were mutually exclusive and the firm’s cost of capital was 10%, which project would you choose? Explain the reasoning behind your choice. 1...
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