Finance Questions: NPV and IRR, Payback, calculate the NPVs for 2 projects, Profitability Index and more...
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NPV and IRR. A project that costs $3,000 to install will provide annual cash flows of $800 for each of the next 6 years.
Is this project worth pursuing if the discount rate is 10 percent?
How high can the discount rate be before you would reject the project?
Maximum Project Rate
Payback. A project that costs $2,500 to install will provide annual cash flows of $600 for the
next 6 years. The firm accepts projects with payback periods of less than 5 years.
Will the project be accepted?
Project payback period
Should this project be pursued if the discount rate is 2 percent?
NPV of Project at 2%
What if the discount rate is 12 percent?
NPV of Project at 12%
Will the firm's decision change as the discount rate changes?
Here are the cash flows for two mutually exclusive projects:
Project C0 C1 C2 C3
A ($20,000) $8,000 $8,000 $8,000
B ($20,000) 0 0 $25,000
Use the MS Excel NPV function to calculate the NPVs for both projects in the profile below. In part B use the IRR function.
a. At what interest rates would you prefer project A to B?
Rate NPVA NPVB
0% FORMULA FORMULA
2% FORMULA FORMULA
4% FORMULA FORMULA
6% FORMULA FORMULA
8% FORMULA FORMULA
10% FORMULA FORMULA
12% FORMULA FORMULA
14% FORMULA FORMULA
16% FORMULA FORMULA
18% FORMULA FORMULA
20% FORMULA FORMULA
b. What is the IRR of each project?
Project A IRR
Project B IRR
Profitability Index. Consider the following projects:
Project C0 C1 C2
A (2,100.00) 2,000.00 1,200.00
B (2,100.00) 1,440.00 1,728.00
a. Calculate the profitability index for A and B assuming a 22 percent opportunity cost of capital.
Project A NPV
Project B NPV
Project A Profitability Index
Project B Profitability Index
b. Use the profitability index rule to determine which project(s) you should accept (i) if you
could undertake both and (ii) if you could undertake only one.
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