Question

The following project is under consideration by Smith's Food Markets, Inc. Smith's requires a 14% rate of return on projects of this nature.

Cost Year 0 = -$200,000

Cash Flows Years 1-3: +$90,000

What is the Profitability Index of the project?

a. 1.50

b. 1.67

c. 1.08

d. 1.35

e. 1.04

Answer #1

Profitability index is given by the formula (1+Npv/initial investment)

Net present value, NPV is the sum of future cash flows discounted to present value net of investment.

Npv = -initial investment + CF1/(1+r) + CF2/(1+r)^2 + CF3/(1+r)^3

Where CF1,2,3 are cash flows in year 1,2,3 respectively and r is the required rate of return

= -200,000 + 90000/(1.14) + 90000/(1.14^2) + 90000/(1.14^3)

= 8946.88

Thus, profitability index = (1+8946.88/200000) = 1.044

Thus, the correct option is e. 1.04

The following project is under consideration by Smith's Food
Markets, Inc. Smith's requires a 14% rate of return on projects of
this nature.
Cost Year 0 = -$200,000
Cash Flows Years 1-3: +$90,000
What is the Profitability Index of the project?
Group of answer choices
a. 1.50
b. 1.67
c. 1.08
d. 1.35
e. 1.04

Use the following information to answer the next two questions.
The following project is under consideration by Riviera Holdings
Corp. Riviera's requires a 13% rate of return on projects of this
nature.
Year 0: Cash Flow -$17,000,000
Year 1: Cash Flow +$10,000,000
Year 2: Cash Flow +$8,000,000
Year 3: Cash Flow +$4,000,000
Year 4: Cash Flow +$6,000,000
What is the profitability index of the project?
a. 1.36
b. 1.30
c. 1.22
d. 1.65
e. 1.27

Use the following information to answer the next two questions.
The following project is under consideration by Riviera Holdings
Corp. Riviera's requires a 13% rate of return on projects of this
nature.
Year 0: Cash Flow -$17,000,000
Year 1: Cash Flow +$10,000,000
Year 2: Cash Flow +$8,000,000
Year 3: Cash Flow +$4,000,000
Year 4: Cash Flow +$6,000,000
What is the net present value of the project?
a. $ 3.81M
b. $ 4.38M
c. $ 5.16M
d. $11.00M
e. $ 4.57M

Marielle Machinery Works forecasts the following cash flows on a
project under consideration. It uses the internal rate of return
rule to accept or reject projects.
C0 C1 C2 C3 −
$ 10,200 0 + $ 7,700 + $ 8,700
Calculate the IRR. (Do not round intermediate calculations.
Enter your answer as a percent rounded to 2 decimal places.)
IRR % ?
Should this project be accepted if the required return is
14%?
Yes No

A firm evaluates all of its projects by applying the IRR rule. A
project under consideration has the following cash flows:
Year
Cash Flows
0
-24326
1
12923
2
12936
3
12896
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A project under consideration has an internal rate of return of
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rate of return on the market portfolio is 14%.
a. What is the required rate of return on the
project? (Do not round intermediate calculations. Enter
your answer as a whole percent.)
b. Should the project be accepted? Yes or
No?
c. What is the required rate of return on the
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A firm evaluates
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Year
Cash Flow
0
–$
28,100
1
12,100
2
15,100
3
11,100
If the required return
is 15 percent, what is the IRR for this project? (Do not
round intermediate calculations and enter your answer as a percent
rounded to 2 decimal places, e.g., 32.16.)

A firm evaluates all of its projects by applying the IRR rule.
A project under consideration has the following cash flows:
Year
Cash Flow
0
–$
28,700
1
12,700
2
15,700
3
11,700
If the required return is 15 percent, what is the IRR for this
project? (Do not round intermediate calculations and enter
your answer as a percent rounded to 2 decimal places, e.g.,
32.16.)
Should the firm accept the project?
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FastTrack Bikes, Inc. is thinking of developing a new composite
road bike. Development will take six years and the cost is $200,000
per year. Once in production, the bike is expected to make $300,000
(after expenses) per year for 10 years. The cash inflows begin at
the end of year 7.
At FastTrack, there is a difference of opinion as to the "best"
decision rule to use. The four rules under consideration are NPV,
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The following are the net cash flows for a project under
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F1 = - $2,000
F2 = - $77,200
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