Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Sun Seekers Ltd. is looking to expand its resort business and currently has quotes from two providers with the initial costs and estimated cash flows to the firm and other sundry characteristics for the projects detailed below:
|
|
Project 1 |
Project 2 |
|
Initial cost |
$780,000 |
$1,100,000 |
|
Expected cash flow to the firm |
$200,000 |
$320,000 |
|
Life of the projects (years) |
5 |
6 |
PP has a cost of capital of 9%. The projects are mutually exclusive due to capital rationing.
Note: The cash flows to the firm are after tax and depreciation.
- Calculate the
Internal Rate of Return (IRR), Profitability Index (PI) and payback period for both projects.
- Based solely on your calculations in a) above, identify which project you would recommend to Sun Seekers Ltd.
- Can NPV be used to rank the projects? If not, what should you do? Explain fully (using calculations) which project should be chosen?
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