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Unformatted text preview: r International is attempting to evaluate the feasibility of investing $95,000 in a piece of equipment that has a 5-year life. The
firm has estimated the cash inflows associated with the proposal as shown in the
following table. The firm has a 12% cost of capital. 420 PART 3 Long-Term Investment Decisions Year (t) Cash inflows (CFt) 1
40,000 a. Calculate the payback period for the proposed investment.
b. Calculate the net present value (NPV) for the proposed investment.
c. Calculate the internal rate of return (IRR), rounded to the nearest whole percent, for the proposed investment.
d. Evaluate the acceptability of the proposed investment using NPV and IRR.
What recommendation would you make relative to implementation of the
LG3 LG4 LG5 9–18 NPV, IRR, and NPV profiles Thomas Company is considering two mutually
exclusive projects. The firm, which has a 12% cost of capital, has estimated its
cash flows as shown in the following table.
Initial investment (CF0)
5 Project B $130,000 $85,000 Cash inflows (CFt)
d. Calculate the NPV of each project, and assess its acceptability.
Calculate the IRR for each project, and assess its acceptability.
Draw the NPV profiles for both projects on the same set of axes.
Evaluate and discuss the rankings of the two projects on the basis of your
findings in parts a, b, and c.
e. Explain your findings in part d in light of the pattern of cash inflows associated with each project.
LG2 LG3 LG4 LG5 LG6 9–19 All techniques—Decision among mutually exclusive investments Pound Industries is attempting to select the best of three mutually exclusive projects. The initial investment and after-tax cash inflows associated with these projects are
shown in the following table.
Cash flows Project A Project B Project C Initial investment (CF0)
Cash inflows (CFt), t 1 to 5 $60,000
$ 31,500 $110,000
$ 32,500 a. Calculate the payback period for each project. CHAPTER 9 Capital Budgeting Techniques 421 b. Calculate the net present value (NPV) of each project, assuming that the firm
has a cost of capital equal to 13%.
c. Calculate the internal rate of return (IRR) for each project.
d. Draw the net present value profiles for both projects on the same set of axes,
and discuss any conflict in ranking that may exist between NPV and IRR.
e. Summarize the preferences dictated by each measure, and indicate which
project you would recommend. Explain why.
LG2 LG3 LG4 LG5 9–20 LG6 All techniques with NPV profile—Mutually exclusive projects Projects A and
B, of equal risk, are alternatives for expanding the Rosa Company’s capacity.
The firm’s cost of capital is 13%. The cash flows for each project are shown in
the following table.
Initial investment (CF0)
5 Project B $80,000 $50,000 Cash inflows (CFt)
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This document was uploaded on 01/19/2014.
- Fall '13