FIN 401 Lecture Notes - Lecture 2: Financial Statement, Tax Shield, Net Present Value
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Romboski, LLC, has identified the following two mutually exclusive projects:
Year | Cash Flow (A) | Cash Flow (B) | ||||||
0 | â$ | 65,000 | â$ | 65,000 | ||||
1 | 41,000 | 27,500 | ||||||
2 | 35,000 | 31,500 | ||||||
3 | 23,500 | 37,000 | ||||||
4 | 15,000 | 24,500 | ||||||
Requirement 1: | |
(a) | What is the IRR for each of these projects? (Do not round intermediate calculations. Enter your answer as a percentage roundedto 2 decimal places (e.g., 32.16).) |
Internal rate of return | |
Project A | % |
Project B | % |
(b) | If you apply the IRR decision rule, which project should the company accept? |
Requirement 2: | |
(a) | Assume the required return is 11 percent. What is the NPV for each of these projects? (Do not round intermediate calculations.Round your answers to 2 decimal places (e.g., 32.16).) |
Net present value | |
Project A | $ |
Project B | $ |
(b) | Which project will you choose if you apply the NPV decision rule? |
Requirement 3: | |
(a) | Over what range of discount rates would you choose Project A? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) |
Project A |
@ % |
(b) | Over what range of discount rates would you choose Project B? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) |
Project B |
@ % |
(c) | At what discount rate would you be indifferent between these two projects? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) |
Discount rate | % |
Romboski, LLC, has identified the following two mutually exclusive projects: |
Year | Cash Flow (A) | Cash Flow (B) | ||||||
0 | ?$ | 52,000 | ?$ | 52,000 | ||||
1 | 28,000 | 15,800 | ||||||
2 | 22,000 | 19,800 | ||||||
3 | 17,000 | 24,000 | ||||||
4 | 12,400 | 25,800 | ||||||
Requirement 1: | |
(a) | What is the IRR for each of these projects? (Do not round intermediate calculations. Enter your answer as a percentage roundedto 2 decimal places (e.g., 32.16).) |
Internal rate of return | |
Project A | % |
Project B | % |
(b) | If you apply the IRR decision rule, which project should the company accept? |
(Click to select)Project AProject B |
Requirement 2: | |
(a) | Assume the required return is 11 percent. What is the NPV for each of these projects? (Do not round intermediate calculations.Round your answers to 2 decimal places (e.g., 32.16).) |
Net present value | |
Project A | $ |
Project B | $ |
(b) | Which project will you choose if you apply the NPV decision rule? |
(Click to select)Project AProject B |
Requirement 3: | |
(a) | Over what range of discount rates would you choose Project A? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) |
Project A | (Click to select)BelowAbove | @ % |
(b) | Over what range of discount rates would you choose Project B? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) |
Project B | (Click to select)BelowAbove | @ % |
(c) | At what discount rate would you be indifferent between these two projects? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) |
Discount rate | % |
Yr | Sates of Affairs Cash Flow | Mcarthys Cash Flow | Gotham Cash Flow | |
0 | -$7,500,000 | -$5,000,000 | -$4,000,000 | |
1 | $5,000,000 | $1,000,000 | $5,750,000 | |
2 | $4,500,000 | $2,000,000 | $5,750,000 | |
3 | $3,000,000 | $3,000,000 | -$1,000,000 | |
4 | -$1,000,000 | $4,000,000 | $0.00 | |
5 | $2,500,000 | $4,000,000 | ||
6 | $2,500,000 | |||
Required rate of return: 8.00%
Calculate the payback period for each project. If our required payback period is 3 years which projects will we accept?
Calculate the Net Present Value of each project. Which projects should we accept?
Calculate the Internal rate of return for each project. Which projects should be accepted?
Calculate the Modified Internal Rate of Return for each project. Which projects should be accepted?
Calculated the Profitability Index for each project. Which projects should be accepted?
If the company only has$10,000,000 for projects which project(s) should be accepted using the equivalent Annual Annuity? Report the EEA for each project?