Question

Year Project A Expected Cash Flows ($) 0 (1,250,000) 1 75,000 2 218,750 3 535,000 4 775,000 5 775,000 Year Project B Expected Cash Flows ($) 0 (1,050,000) 1 650,000 2 500,000 3 226,250 4 137,500 5 62,500 Metrics Payback Period (in years) (A)3.54 (B)1.8 Discounted payback period (in years) (A)4.58 (B)2.72 Net Present Value (NPV) (A)$160,816 (B)$151,742 Internal Rate of Return (A)18.90% (B)23.84% Profitability Index (A)1.13 (B)1.14 Modified Internal Rate of Return (MIRR) (A)17.82% (B)18.15% a). Which of the metrics would you propose and why? b). Which of the projects would you recommend. c) What will be the limitations of the chosen metrics and outline what further analysis you would recommend.

There was no specific discount rate but in the question it was noted that the required rate of return was 15%.

Answer #1

a) I would propose NPV over other metrics because NPV indicates the value added to the firm by undertaking a project, which will be reflected in the stock price over a period of time.

b) As NPV is higher for A, you should recommend Project A.

c) The biggest limitation of NPV is that it is highly sensitive to discount rates. At required return of 15%, NPV for A is higher but it could be a case that for a different required return, NPV of B could be higher.

In order to outcome this bias, we need to further evaluate the specific details about required return for each project depending on their risk.

Samantha Groves and Harry Finch are facing an important
decision. After having discussed different financial scenarios into
the wee hours of the morning, the two computer engineers felt it
was time to finalize their cash flow projections and move to the
next stage – decide which of two possible projects they should
undertake.
Both had a bachelor degree in engineering and had put in several
years as maintenance engineers in a large chip manufacturing
company. About six months ago, they...

Assume the following cash flows for Project A: Year 0
=$(10,000); Year 1 = $4,000; Year 2 = $3,500; Year 3 = $1,500; Year
4 = $3,000; and Year 5 = $1,500. The company’s hurdle rate is
9.00%. For Project A, please calculate: 1) the discounted payback
period; 2) the net present value; 3) the internal rate of return;
and 4) the modified internal rate of return.

13) Assume the following cash flows for Project A: Year 0
=$(10,000); Year 1 = $4,000; Year 2 = $3,500; Year 3 = $1,500; Year
4 = $3,000; and Year 5 = $1,500. The company’s hurdle rate is
9.00%. For Project A, please calculate: 1) the discounted payback
period; 2) the net present value; 3) the internal rate of return;
and 4) the modified internal rate of return. (3 points)

You are analyzing a project and have prepared the following
data:
Year Cash flows
0 -$275,000
1 $ 50,000
2 $ 75,000
3 $ 95,000
4 $ 15,000
Required payback period 3 years
Required rate of return 5%
You are required to:
a) Determine the project’s Profitability Index, Internal Rate of
Return, NPV and Discounted Payback
Period
b) Decide whether to accept the project based on the above
investment decision criteria?

Here are the expected cash flows for three projects:
Cash Flows (dollars)
Project
Year:
0
1
2
3
4
A
−
6,300
+
1,325
+
1,325
+
3,650
0
B
−
2,300
0
+
2,300
+
2,650
+
3,650
C
−
6,300
+
1,325
+
1,325
+
3,650
+
5,650
a. What is the payback period on each of the
projects?
b. If you use a cutoff period of 2 years, which
projects would you accept?
Project A
Project B...

Project P costs $15,000 and is expected to produce benefits
(cash flows) of $4,500 per year for five years. Project Q costs
$37,500 and is expected to produce cash flows of $11,100 per year
for five years. Calculate each project’s (a) net present value
(NPV), (b) internal rate of return (IRR), and (c) mod- ified
internal rate of return (MIRR). The firm’s required rate of return
is 14 percent. Compute the (a) NPV, (b) IRR, (c) MIRR,
and (d) discounted payback...

Here are the expected cash flows for three projects:
Project Year 0 1 2 3
4
A -5,400 +1,100 +1,100
+3,200 0
B -1,400 0 +1,400
+2,200 +3,200
C -5,400 +1,100 +1,100
+3,200 +5,200
a. what is the payback period on each of the projects?
b. If you use a cutoff period of 2 years, which projects would
you accept?
c. If you use a cutoff...

Telesis Corp is considering a project that has the
following cash flows:
Year
Cash Flow
0
-$1,000
1
400
2
300
3
500
4
400
The company’s weighted average cost of capital (WACC) is
10%. What are the project’s payback period (Payback), internal rate
of return (IRR), net present value (NPV), and profitability index
(PI)?
A.
Payback = 3.5, IRR = 10.22%, NPV = $1260, PI=1.26
B.
Payback = 2.6, IRR = 21.22%, NPV = $349, PI=1.35
C.
Payback =...

A project has cash flows of –$78,400, $22,500, $37,300, and
$53,200 for Years 0 to 3, respectively. The required rate of return
is 4 percent. The regular payback for this project is ________
years, while the discounted payback for this project is ______
years. Assuming that the preset (cutoff) rate is 2.50 years, in
both cases you should __________ the project. Select one:
A. 1.46; 1.53; accept
B. 2.54; 2.89; reject
C. 2.35; 2.89; reject
D. 2.35; 2.47; accept
E....

Cash Flows
Year
Project A
0
-$100.00
1
$50.00
2
$60.00
3
$10.00
4
$3.00
WACC =
10.00%
Given the information in the table, what is project A's payback
period?
2.02 years
1.83 years
2.00 years
1.67 years

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