Capital Budgeting: IRR, NPV, and Project Selection
Capital Budgeting Problems and Solutions
CH8 HW A project has an initial cost of $12,100 and cash flows of -$2,100, $5,800, $16,600, and -$800 for Years 1 to 4, respectively. How many IRRs will this project have? # of IRR’s = number of sign changes (negative to positive=1)
A project has an initial cost of $12,670 and cash inflows of $2,400 a year for Years 1 and 2 and a final cash inflow in Year 6 of $15,400. The required return is 14.5 percent. What is the net present value of this project? Should this project be accepted or rejected based on NPV? $-1,909.10; reject Chart with t=year and cash flows NPV formula *if positive accept
You are considering two independent projects. The required rate of return is 11.25 percent for project A and 11.85 percent for project B. Project A has an initial cost of $38,900 and cash inflows of $11,400, $16,900, and $26,200 for Years 1 to 3, respectively. Project B has an initial cost of $41,300 and cash inflows of $20,000 a year for three years. Which project(s), if either, should you accept? Accept Both Find NPV for both
A project has an initial cost of $38,400 and projected cash inflows of $11,200, $19,600, and $18,100 for Years 1 to 3, respectively. The required rate of return for this investment is 8.7 percent. What is the IRR? Should this project be accepted or rejected based on IRR? Make chart years and cash flow use IRR formula
Miller’s is considering a 2-year expansion project that will require $410,000 up front. The project will produce cash flows of $358,000 and $98,000 for Years 1 and 2, respectively. Based on the profitability index (PI) rule, should the project be accepted if the discount rate is 12 percent? Why or why not? No; because the PI is -.03 NPV/ ABS Value of initial cost
Leo is considering adding a deli to his general store. The remodeling expenses and shelving costs are estimated at $2,500. Deli sales are expected to produce net cash inflows of $1,300, $1,600, $1,700, and $1,750 for Years 1 to 4, respectively. Leo has a firm 3-year payback requirement. Should he add the deli? Yes; because the payback period is 1.75 years *try to get 2500 back year 1=1300 year 2=1600 only need 1200 of year 2 so 1200/1600 =.75⟶1.75 years
A project has an initial cash inflow of $36,400 and a cash outflow of $42,900 in Year 1. The discount rate is 20 percent. Should this project be accepted or rejected based on IRR? Why? Accepted: because the IRR of 17.86 percent is less than the discount rate *use IRR formula Because this is a financing type project, the project should be accepted since the IRR of 17.86 percent is less than the discount rate of 20 percent. This is verified by the positive NPV at the 20 percent discount rate.
Firms that make investment decisions based upon the payback rule may be biased toward rejecting projects: with long lives
NPV fails as a decision rule when the firm faces capital rationing.
When projects are mutually exclusive, selection should be made according to the project with the: highest NPV. CH 8 Excel make the year’s cash flow chart find npv and irr then make another chart for discount rate 0%-40% or 60%. Do NPV for each one use F4 then make NPV Profile insert scatter plot 2cnd one