FI 311 Connect homework #11

# FI 311 Connect homework #11 - FI 311 Connect homework#11 1...

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FI 311 Connect homework #11 1) What is the profitability index for an investment with the following cash flows given a 8 percent required return? Year Cash Flow 0 \$-21,000 1 \$7,400 2 \$9,800 3 \$8,700 1.01 1.07 1.06 1.04 .99 PV inflows = \$7,400 + \$9,800 + \$8,700 = \$22,160.11 (\$1.08) 1 (\$1.08) 2 (\$1.08) 3 PI = \$22,160.11 / \$21,000 = 1.06 2) A project has an initial cost of \$8,700 and produces cash inflows of \$2,600, \$4,900, and \$1,600 over the next three years, respectively. What is the discounted payback period if the required rate of return is 7 percent? 2.15 years 2.75 years 2.96 years never 2.28 years DCF = \$2,600 + \$4,900 + \$1,600 = 8,016 (1+ .07) 1 (1+ .07) 2 (1+ .07) 3 The project never pays back on a discounted basis as the discounted cash inflows are less than the initial cash outflow. 3) A firm evaluates all of its projects by applying the IRR rule. Year Cash Flow 0 –\$33,169 1 22,000 2 15,000

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3 8,000 Requirement 1: Determine the IRR for the above project. 20.48% Requirement 2: If the required return is 22 percent, should the firm accept the above project? No
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FI 311 Connect homework #11 - FI 311 Connect homework#11 1...

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