Question

Expected Net Cash Flows

Year Project T Project F

0 ($100,000) ($100,000)

1 75,000 40,000

2 65,000 42,000

3 — 44,000

4 — 46,000

The projects provide a necessary service, so whichever one is selected is expected to be repeated into the foreseeable future. Both projects have a 12% cost of capital.

c. Suppose you replicate Project T so that it has the same life as Project F. Which project would you choose?

NPV Project F = $29,748.59

EAA Project F = $9,794.26

Answer #1

Expected Net Cash Flows
Year Project
T Project
F
0
($100,000)
($100,000)
1
75,000
40,000
2
65,000
42,000
3
—
44,000
4
—
46,000
The projects provide a necessary service, so whichever one is
selected is expected to be repeated into the foreseeable future.
Both projects have a 12% cost of capital.
a. What is each project’s initial NPV without
replication?
b. What is each project’s equivalent annual
annuity?
c. Suppose you replicate Project T so...

Expected
Net Cash Flows
Year Project
A Project
B
0
($100,000)
($100,000)
1
75,000
40,000
2
65,000
42,000
3
—
44,000
4
—
46,000
The projects provide a necessary service, so whichever one is
selected is expected to be repeated into the foreseeable future.
Both projects have a 14% cost of capital.
a. What is each project’s initial NPV without
replication?
b. What is each project’s equivalent annual
annuity?
c. Suppose you replicate Project A so...

Pediatrics Partners is evaluating a project with the following
net cash flows and probabilitites.... The Year 5 value includes
salvage value. Pediatrics Partners corporate capital of use is 12%.
What is the projects expected NPV assuming average risk? What art
the projects most likely, worse case, and best case NPV? What is
the projects expected NPV on the basis of the scenario analysis?
What i the projects standard deviation of NPV? Assume the managers
judge the project to have higher...

You are analyzing the Photon project, which has the expected
cash flows below. The Photon project has a 4 year life (assume
"best life") and is competing against another project for funding
(the Warp project). That is, the two projects are mutually
exclusive. The Warp project has an 8 year life (assume "best life";
cash flows not provided).
You notice that the projects have lives of different lengths, so
you ask whether the Photon project can be repeated at the...

You are analyzing the Photon project, which has the expected
cash flows below. The Photon project has a 4 year life (assume
"best life") and is competing against another project for funding
(the Warp project). That is, the two projects are mutually
exclusive. The Warp project has an 8 year life (assume "best life";
cash flows not provided). You notice that the projects have lives
of different lengths, so you ask whether the Photon project can be
repeated at the...

Net present value (NPV)
Evaluating cash flows with the NPV method
The net present value (NPV) rule is considered one of the most
common and preferred criteria that generally lead to good
investment decisions.
Consider this case:
Suppose Blue Hamster Manufacturing Inc. is evaluating a proposed
capital budgeting project (project Beta) that will require an
initial investment of $2,750,000. The project is expected to
generate the following net cash flows:
Year
Cash Flow
Year 1
$325,000
Year 2
$475,000
Year...

1. Net present value (NPV)
Evaluating cash flows with the NPV method
The net present value (NPV) rule is considered one of the most
common and preferred criteria that generally lead to good
investment decisions.
Consider this case:
Suppose Happy Dog Soap Company is evaluating a proposed capital
budgeting project (project Beta) that will require an initial
investment of $3,225,000. The project is expected to generate the
following net cash flows:
Year
Cash Flow
Year 1
$375,000
Year 2
$425,000...

Gardial Fisheries is considering two mutually exclusive
investments. The projects' expected net cash flows are as
follows:
Expected Net Cash Flows
Time Project A Project B
0 ($375) ($575)
1 ($300) $190
2 ($200) $190
3 ($100) $190
4 $600 $190
5 $600 $190
6 $926 $190
7 ($200) $0
a. If each project's cost of capital is 12%, which project
should be selected? If the cost of capital is 18%, what project is
the proper choice?
@ 12% cost...

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...

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...

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