Question

1.The Hyatt Group Inc., has identified the following two mutually exclusive projects:

Cash Flows Cash Flows

Year Project A Project B

0 -$10,000 _$10,000

1 200 5,000

2 500 6,000

3 8,200 500

4 4,800 500

- What is the IRR of each of these projects? If you apply the IRR decision rule, which project should the company accept? Is this decision necessarily correct?

- If the required rate of return is 9 percent, what is the NPV of each of the projects? Which project will you choose if you apply the NPV decision rule?

- Over what range of discount rates would you choose project A? Project B? At what discount rate would you be indifferent between these two projects? Explain.

Answer #1

Homework - Capital Budgeting
1.The Hyatt Group Inc., has identified the following two
mutually exclusive projects:
Cash FlowsCash Flows
YearProject AProject B
0-$10,000_$10,000
1 200 5,000
2 500 6,000
3 8,200 500
4 4,800 500
a. What is the IRR of each of these projects? If you apply the
IRR decision rule, which project should the company accept? Is this
decision necessarily correct?
b. If the required rate of return is 9 percent, what is the
NPV of each of...

Garage, Inc., has identified the
following two mutually exclusive projects:
Year
Cash Flow (A)
Cash Flow (B)
0
–$
28,000
–$
28,000
1
13,400
3,800
2
11,300
9,300
3
8,700
14,200
4
4,600
15,800
a-1
What is the IRR for each of these projects? (Do not
round intermediate calculations. Enter your answers as a percent
rounded to 2 decimal places, e.g., 32.16.)
IRR
Project A
%
Project B
%
a-2
Using the IRR decision rule, which...

Bruin, Inc., has identified the following two mutually
exclusive projects:
Year
Cash Flow (A)
Cash Flow (B)
0
–$37,000
–$37,000
1
19,000
6,000
2
14,500
12,500
3
12,000
19,000
4
9,000
23,000
a. What is the IRR for Project A?
b. What is the IRR for Project B?
c. If the required return is 11 percent, what
is the NPV for Project A?
d. If...

Bruin, Inc., has identified the following two mutually
exclusive projects:
Year
Cash Flow (A)
Cash Flow (B)
0
–$37,000
–$37,000
1
19,000
6,000
2
14,500
12,500
3
12,000
19,000
4
9,000
23,000
a. What is the IRR for Project A?
b. What is the IRR for Project B?
c. If the required return is 11 percent, what
is the NPV for Project A?
d. If...

Mahjong, Inc., has identified
the following two mutually exclusive projects:
Year
Cash Flow
(A)
Cash Flow
(B)
0
–$37,300
–$37,300
1
19,660
7,180
2
15,170
13,680
3
12,660
20,160
4
9,660
24,160
Required:
(a)
What is the IRR for Project
A?
(b)
What is the IRR for Project
B?
(c)
If the required return is 11
percent, what is the NPV for Project A?
(d)
If the required...

Bruin, Inc., has identified the following two mutually
exclusive projects:
Year
Cash Flow (A)
Cash Flow (B)
0
–$36,500
–$36,500
1
18,820
6,400
2
14,320
12,900
3
11,820
19,400
4
8,820
23,400
a. What is the IRR for Project A?
b. What is the IRR for Project B?
c. If the required return is 13 percent, what
is the NPV for Project A?
d. If...

Garage, Inc., has identified the following two mutually
exclusive projects:
Year
Cashflow A $
Cashflow B $
0
-29000
-29000
1
14400
4300
2
12300
9800
3
9200
15200
4
5100
16800
Requirements:
Using the IRR decision rule, which project should the company
accept? Is this decision necessarily correct?
If the required return is 12 percent, which project will the
company choose if it applies the NPV decision rule?

NPV versus IRR Consider the
following cash flows on two mutually exclusive projects for the
Bahamas Recreation Corporation. Both projects require an annual
return of 15 percent.
YEAR
DEEPWATER FISHING
NEW SUBMARINE RIDE
0
−$835,000
−$1,650,000
1
450,000
1,050,000
2
410,000
675,000
3
335,000
520,000
As a financial analyst for the company, you are asked the
following questions.
If your decision rule is to accept the project with the greater
IRR, which project should you choose?
Since you are fully...

You are considering the following two
mutually exclusive projects with the following cash flows:
Project
A
Project B
Year Cash
Flow
Year Cash Flow
0
-$75,000
0 -$70,000
1
$19,000
1 $10,000
2
$48,000
2 $16,000
3
$12,000
3 $72,000
Required rate of
return
10
%
13 %
Calculate the NPV, IRR,...

NPV verses IRR Consider the following cash flows on the two
mutually exclusive projects for the Bahamas Recreation Corporations
(BRC). Both projects require an annual return on 14%
Year Deep Water Fishing New Submarine Ride
0 -$850,000 -$1,650,000
1 320,000 810,000
2 470,000 750,000
3 410,000 690,000
a) If your decision rile is to accept the project with the
greater IRR, which project should you choose?
c) To be prudent, you compute the NPV for both projects. Which
project should you...

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