FIN 401 Lecture Notes - Lecture 2: Capital Cost Allowance, Net Present Value, Sunk Costs

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7 Feb 2018

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Payback period: how long does it take to get the initial unit back in a nominal sense, decision rule: accept the project if the payback period is less than some pre-set limit. I% is always 0 for payback period if it is not discounted. Is problematic when the cash flows change signs more than once and when a choice between mutually exclusive projects needs to be made; if you choose one project, you cannot choose the other. If the internal rate of return fails, use the net present value and choose the project with the highest net present value because it creates the most value. Crossover rate: the discount rate at which the net present value of two projects are equal, calculate the different between each cash flow between the projects and enter those differences as cash flows on the calculator.

Related Questions

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?

rubymosquito903

Suppose Palmer Properties is considering investing $3.6 million today (i.e., C₀ = -3,600,000) on a new project that is expected to last for 8 years. The project is expected to generate annual cash flows of C₁ = -200,000; C₂ = 400,000, C₃ = 750,000 and then $900,000 for period C₄ through C_8. If the discount rate is 7% and managementâs payback period cutoff is 5 years:
(a) What is the payback period for the project?
(b) What is the net present value of the project ?
(c) What is the internal rate of return on the project ?
(d) Under which method(s) above should the company accept the project (applying the acceptance rules)? Explain.

bluechimpanzee1

Following is information about two independent projects that a company is evaluating: Capital Budgeting Technique Project X Project Y Net present value $5,000 $4,950 Internal rate of return 15.5% 17.0% Discounted payback period 5.1 years 4.6 years (a)Which project(s) should be chosen? Explain why. (b)What can be concluded about the companyâs required rate of return, r?

FIN 401 Lecture Notes - Lecture 2: Capital Cost Allowance, Net Present Value, Sunk Costs

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