Chap8 - Homework Manager - Corporate Finance FIN301-004

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Question 1: Score 0.5/1 Your response Correct response Calculating Payback Offshore Drilling Products, Inc., imposes a payback cutoff of 3 years for its international investment projects. Suppose the company has the following two projects available. Project A has payback period of 3 (0%) years, while project B has a payback period of 4 (0%) years. Using only the payback cutoff of 3 years, the company should accept (25%) project A and reject (25%) project B. (Round your answers to 2 decimal places.) Year Cash Flow (A) Cash Flow (B) 0 –$ 50,000 –$ 422,000 1 34,000 11,000 2 15,000 26,000 3 10,000 33,000 4 1,000 410,000 Calculating Payback Offshore Drilling Products, Inc., imposes a payback cutoff of 3 years for its international investment Suppose the company has the following two projects available. Project A has payback period of 2.1 tolerance of ± 1.0% years, while project B has a payback period of 3.86 with a toler ± 1.0% years. Using only the payback cutoff of 3 years, the company should accept project A and project B. (Round your answers to 2 decimal places.) Year Cash Flow (A) Cash Flow (B) 0 –$ 50,000 –$ 422,000 1 34,000 11,000 2 15,000 26,000 3 10,000 33,000 4 1,000 410,000 Total grade: 0.0×1/4 + 0.0×1/4 + 1.0×1/4 + 1.0×1/4 = 0% + 0% + 25% + 25% Feedback: Project A has cash flows of: Cash flows = $34,000 + 15,000 Cash flows = $49,000 during the first 2 years. The cash flows are still short by $1,000 of recapturing the initial investment, so the payback for Project A is: Payback = 2 + ($1,000 / $10,000) Payback = 2.1 years Project B has cash flows of: Cash flows = $$11,000 + 26,000 + 33,000 Cash flows = $70,000 during the first 3 years. The cash flows are still short by $352,000 of recapturing the initial investment, so the payback for Project B is: Payback = 3 + ($352,000 / $410,000) Payback = 3.86 years Using the payback criterion and a cutoff of 3 years, accept project A and reject project B. Question 2: Score 0.5/1 Your response Correct response Calculating IRR A firm evaluates all of its projects by applying the IRR rule. The IRR for the following project is 24.25 (0%) percent. If the required return is 27 percent, the firm should reject (50%) the project. (Input answer as a percent rounded to 2 decimal places, without the percent sign.) Year Cash Flow 0 –$ 32,816 1 20,000 2 17,000 3 9,000 Calculating IRR A firm evaluates all of its projects by applying the IRR rule. The IRR for the following project is 21. tolerance of ± 1.0% percent. If the required return is 27 percent, the firm should reject the pro answer as a percent rounded to 2 decimal places, without the percent sign.) Year Cash Flow 0 –$ 32,816 1 2 0 , 0 0 0 2 1 7 , 0 0 0 3 9 , 0 0 0 Total grade: 0.0×1/2 + 1.0×1/2 = 0% + 50% Feedback: The IRR is the interest rate that makes the NPV of the project equal to zero. So, the equation that defines the IRR for this project is: 0 = – $32,816 + $20,000/(1+IRR) + $17,000/(1+IRR) 2 + $9,000/(1+IRR) 3 Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that: IRR = 21.9% Since the IRR is less than the required return, we would reject the project.
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Chap8 - Homework Manager - Corporate Finance FIN301-004

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