Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Provide an evaluation of two proposed project, both with a 5-year expected lives and identical initial outlays of $110,000.Both of these projects involve additions to

Provide an evaluation of two proposed project, both with a 5-year expected lives and identical initial outlays of $110,000.Both of these projects involve additions to a highly successful product line, and as a result, the required rate of return on both projects has been established at 12 percent.The expected free cash flows from each project are as follows:

Project A

Project B

Initial outlay

-$110,000

-$110,000

Inflow year 1

20,000

40,000

Inflow year 2

30,000

40,000

Inflow year 3

40,000

40,000

Inflow year 4

50,000

40,000

Inflow year 5

70,000

40,000

In evaluating these projects, please respond to the following question:

  1. Why is the capital-budgeting process so important?
  2. Why is it difficult to find exceptionally profitable projects?
  3. What is the payback period on each project? If the organization imposes a 3-year maximum acceptable payback period, which of these projects should be accepted?
  4. What are the criticisms of the payback period?
  5. Determine the NPV for each of these projects. Should they be accepted?
  6. Describe the logic behind the NPV.
  7. Determine the PI for each of these projects. Should they be accepted?
  8. Would you expect the NPV and PI methods to give consistent accept/reject decisions? Why or why not?
  9. What would happen to the NPV and PI for each project if the required rate of return increased?If the required rate of return decreased?
  10. Determine the IRR for each project.Should they be accepted?
  11. How does a change in the required rate of return affect the project's internal rate of return?

What reinvestment rate assumptions are implicitly made by the NPV and IRR methods? Which one is better?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Analysis for Financial Management

Authors: Robert C. Higgins

12th edition

1259918963, 9781260140729 , 978-1259918964

More Books

Students also viewed these Finance questions

Question

Work Problem 55 in Chapter 11.(Appendix)

Answered: 1 week ago

Question

Work Problem 45 in Chapter 9.(Appendix)

Answered: 1 week ago