Machines A and B are mutually exclusive and are expected to produce the following real cash flows:MachineABCash Flows ($ thousands)Co-114C₁C3+124+135-76+98+76+74The real opportunity cost of capital is 8%.a. Calculate the NPV of each machine.b. Calculate the equivalent annual cash flow from each machine.c. Which machine should you buy?

Capital Budgeting AnalysisWe will analyze Machines A and B to determine the better investment based…

Answered: Machines A and B are mutually exclusive…

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 4EB: Assume a company is going to make an investment in a machine of $825,000 and the following are the...

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Machines A and B are mutually exclusive and are expected to produce the following real cash flows: Cash Flows ($ thousands) Machine C0 C1 C2 C3 A −105 +115 +126 B −125 +115 +126 +138 The real opportunity cost of capital is 10%.a. Calculate the NPV of each machine. (Enter your answers in dollars not in thousands. Round your answers to the nearest whole dollar amount.) b. Calculate the equivalent annual cash flow from each machine. (Enter your answers in dollars not in thousands. Round your answers to the nearest whole dollar amount.) c. Which machine should you buy?multiple choice Machine A Machine B
Assume a company is going to make an investment in a machine of $825,000 and the following are the cash flows that two different products would bring. Which of the two options would you choose based on the payback method?
onsider the following cash flows: C0=-$42 C1=+$38 C2=+$38 C3=+$38 C4=-$76 a. Which two of the following rates are the IRRs of this project?
Consider projects A and B with the following cash flows: C0 C1 C2 C3 A − $ 27 + $ 16 + $ 16 + $ 16 B − 52 + 27 + 27 + 27 a-1. What is the NPV of each project if the discount rate is 10%? (Do not round intermediate calculations. Round your answers to 2 decimal places.) a-2. Which project has the higher NPV? b-1. What is the profitability index of each project? (Do not round intermediate calculations. Round your answers to 2 decimal places.) b-2. Which project has the higher profitability index? c. Which project is most attractive to a firm that can raise an unlimited amount of funds to pay for its investment projects? d. Which project is most attractive to a firm that is limited in the funds it can raise?
Consider the following cash flows: Co -$27 C₁ +$ 24 C2 +$ 24 C3 +$ 24 C4 -$46 a. Which two of the following rates are the IRRs of this project? Note: You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answers and double click the box with the question mark to empty the box for a wrong answers. Any boxes left with a question mark will be automatically graded as incorrect. 2.5% ? 33.9% ? 14.3% ? 33.9% ? 40.0% b., c., and d. What is project NPV if the discount rates are 1%, 18%, and 36%? Note: Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 3 decimal places. b. C. Discount Rate 1% 18% 36% d. NPV
Consider the following two projects: Cash flows Project A Project B C0�0 −$ 240 −$ 240 C1�1 100 123 C2�2 100 123 C3�3 100 123 C4�4 100 a. If the opportunity cost of capital is 8%, which of these two projects would you accept (A, B, or both)? b. Suppose that you can choose only one of these two projects. Which would you choose? The discount rate is still 8%. c. Which one would you choose if the cost of capital is 16%? d. What is the payback period of each project? e. Is the project with the shortest payback period also the one with the highest NPV? f. What are the internal rates of return on the two projects? g. Does the IRR rule in this case give the same answer as NPV? h. If the opportunity cost of capital is 8%, what is the profitability index for each project? i. Is the project with the highest profitability index also the one with the highest NPV? j. Which measure should you use to choose between the projects?
Consider the following cash flows: C0=-$42 C1=+$38 C2=+$38 C3=+$38 C4=-$76 a. Which two of the following rates are the IRRs of this project? (You may select more than one answer.) check all that apply 2.5% 7.8% 14.3% 32.5% 40.0% b. What is project NPV if the discount rates are 5%, 20%, 40%? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answer to 3 decimal places.)
Consider the following cash flows: Co -$29 C₁ +$ 25 C₂ +$ 25 C3 +$ 25 C4 -$48 a. Which two of the following rates are the IRRs of this project? Note: You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answers and double click the box with the question mark to empty the box for a wrong answers. Any boxes left with a question mark will be automatically graded as incorrect. 2.5% 7.1% 14.3% 26.4% 40.0% b., c., and d. What is project NPV if the discount rates are 5%, 17%, and 34%? Note: Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 3 decimal places. b. Discount Rate NPV 5%
Project Y has following cash flows: C0 = -800, C1 = +6,000, and C2 = -6,000. Calculate the IRRs for the project: For what range of discount rates does the project have positive NPV (Plot a graph with NPV on the vertical axis and discount rate on the horizontal axis).
6.Calculate the project's Modified Internal Rate of Return (MIRR). What critical assumption does the MIRR make that differentiates it from the IRR? TIP : look for the definition of Modified Internal Rate of Return, and then do it in excel, easy !!! Year Net Cash flow Future Value of Net Cash flow 0 -$20.8 example 1 $4.5 $7.97 (n=6, i=10%)=fv(.1,6,,4.5) 2 $6.3 (n=5, i=10%) 3 $5.2 (n=4, i=10%) 4 $3.9 (n=3, i=10%) 5 $2.1 (n=2, i=10%) 6 $1.3 (n=1, i=10%) 7 $0.5 (n=0, i=10%) Sum = $XX.XX MIRR = ( in excel ) Rate ( 7,-20.8, xx.xx) 7.Where does the value of MIRR fall relative to the discount rate and IRR?
4. You have the expected cash flows for this machine as follows: Initial cost ($12,000), cash flow year 1 $5,000, year 2 $4,000, year 3, $ 6,000, year 4 $2,000. The required rate of return is 13%. The NPV is
Problem 1.a Given the following cash flows for Project M: C0 = -1,000, C1 = +200, C2 = +700, C3 = +698 calculate the IRR for the project. Problem 1.b Project X has the following cash flows: C0 = +2,000, C1 = -1,150, and C2 = -1,150. If the IRR of the project is 9.85% and if the cost of capital is 12%, would you accept or reject? Problem 1.c Story Company is investing in a giant crane. It is expected to cost $6.0 million in initial investment, and it is expected to generate an end-of-year after-tax cash flow of $3.0 million each year for three years. Calculate the NPV at 12%. Would you suggest company to invest? Problem 1.d The real interest rate is 3.0% and the inflation rate is 5.0%. What is the nominal interest rate? Problem 1.e Your firm expects to receive a cash flow in two years of $10,816 in nominal terms. If the real rate of interest is 2% and the inflation rate is 4%, what is the real cash flow for year 2?

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