See attached file, THESE ONES HAVE TO BE CORRECT or there is no way I will pass.....Please try hard :)

SAMPLE: Bill plans to open a self-serve grooming center in a storefront. The grooming equipment will cost $410,000, to be paid immediately. Bill expects aftertax cash inflows of $89,000 annually for seven years, after which he plans to scrap the equipment and retire to the beaches of Nevis. The first cash inflow occurs at the end of the first year. Assume the required return is 14 percent. What is the project's profitability index (PI)? (Do not round intermediate calculations. Round your answer to 3 decimal places (e.g., 32.161).) PI .931 1% Should the project be accepted? No Explanation: The profitability index is defined as the PV of the cash inflows divided by the PV of the cash outflows. The cash flows from this project are an annuity, so the equation for the profitability index is: PI = C(PVIFAR,t) / C0 PI = $89,000(PVIFA14%,7) / $410,000 PI = .931 The project should not be accepted because the PI is less than 1. Calculator Solution: Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation. CFo C01 F01 0 $89,000 7 I = 14% NPV CPT $381,659.13 PI = $381,659.13 / $410,000 = .931 MY QUESTION: Bill plans to open a self-serve grooming center in a storefront. The grooming equipment will cost $450,000, to be paid immediately. Bill expects aftertax cash inflows of $97,000 annually for seven years, after which he plans to scrap the equipment and retire to the beaches of Nevis. The first cash inflow occurs at the end of the first year. Assume the required return is 12 percent. What is the project's profitability index (PI)? (Do not round intermediate calculations. Round your answer to 3 decimal places (e.g., 32.161).) PI Should the project be accepted? No Yes SAMPLE: Consider the following cash flows of two mutually exclusive projects for Spartan Rubber Company. Assume the discount rate for Spartan Rubber Company is 7 percent. Year 0 1 2 3 Dry Prepreg 1,870,00 -$ 0 1,117,000 934,000 767,000 Solvent Prepreg -$ 835,000 460,000 770,000 424,000 a. What is the payback period for each project? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).) Payback period Dry Prepreg Solvent Prepreg years 1.81 1% years 1.49 1% b. What is the NPV for each project? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).) NPV $ Dry Prepreg 615,817.48 0.1% $ Solvent Prepreg 613,564.66 0.1% c. What is the IRR for each project? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places (e.g., 32.16).) IRR % Dry Prepreg 25.54 1% Solvent Prepreg 43.79 1% % d. Calculate the incremental IRR for the cash flows. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).) Incremental IRR % 7.14 1% Explanation: a. The payback period is the time that it takes for the cumulative undiscounted cash inflows to equal the initial investment. Dry Prepreg: Cumulative cash flows Year 1 = $1,117,000 Cumulative cash flows Year 2 = $1,117,000 + 934,000 = $1,117,000 = $2,051,000 Payback period = 1 + ($753,000 / $934,000) = 1.81 years Solvent Prepreg: Cumulative cash flows Year 1 = $460,000 Cumulative cash flows Year 2 = $460,000 + 770,000 = $460,000 = $1,230,000 Payback period = 1 + ($375,000 / $770,000) = 1.49 years Since the solvent prepreg has a shorter payback period than the dry prepreg, the company should choose the solvent prepreg. Remember the payback period does not necessarily rank projects correctly. b. The NPV of each project is: NPVDry prepreg = -$1,870,000 + $1,117,000 / 1.07 + $934,000 / 1.072 + $767,000 / 1.073 NPVDry prepreg = $615,817.48 NPVSolvent prepreg = -$835,000 + $460,000 / 1.07 + $770,000 / 1.072 + $424,000 / 1.073 NPVSolvent prepreg = $613,564.66 The NPV criteria implies accepting the dry prepreg because it has the highest NPV. c. The IRR is the interest rate that makes the NPV of the project equal to zero. So, the IRR of the dry prepreg is: 0 = -$1,870,000 + $1,117,000 / (1 + IRR) + $934,000 / (1 + IRR)2 + $767,000 / (1 + IRR)3 Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that: IRRDry prepreg = 25.54% And the IRR of the solvent prepreg is: 0 = -$835,000 + $460,000 / (1 + IRR) + $770,000 / (1 + IRR)2 + $424,000 / (1 + IRR)3 Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that: IRRSolvent prepreg = 43.79% The IRR criteria implies accepting the solvent prepreg because it has the highest IRR. Remember the IRR does not necessarily rank projects correctly. d. Incremental IRR analysis is necessary. The solvent prepreg has a higher IRR, but is relatively smaller in terms of investment and NPV. In calculating the incremental cash flows, we subtract the cash flows from the project with the smaller initial investment from the cash flows of the project with the large initial investment, so the incremental cash flows are: Dry prepreg Solvent prepreg Year 0 -$ 1,870,000 -835,000 Year 1 $ 1,117,000 460,000 $ Year 2 934,000 770,000 Year 3 $ 767,000 424,000 Dry prepreg - Solvent prepreg -$ 1,035,000 $ 657,000 $ 164,000 $ 343,000 Setting the present value of these incremental cash flows equal to zero, we find the incremental IRR is: 0 = -$1,035,000 + $657,000 / (1 + IRR) + $164,000 / (1 + IRR)2 + $343,000 / (1 + IRR)3 Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that: Incremental IRR = 7.14% For investing-type projects, we accept the larger project when the incremental IRR is greater than the discount rate. Since the incremental IRR, 7.14 percent, is greater than the required rate of return of 7 percent, we choose the dry prepreg. Calculator Solution: Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation. b. Dry prepreg CFo C01 F01 C02 F02 C03 F03 I = 7% NPV CPT $615,817.48 Solvent prepreg -$1,870,000 $1,117,000 1 $934,000 1 $767,000 1 CFo C01 F01 C02 F02 C03 F03 I = 7% NPV CPT $613,564.66 -$835,000 $460,000 1 $770,000 1 $424,000 1 c. Dry prepreg CFo C01 F01 C02 F02 C03 F03 IRR CPT -$1,870,000 $1,117,000 1 $934,000 1 $767,000 1 Solvent prepreg CFo C01 F01 C02 F02 C03 F03 IRR CPT -$835,000 $460,000 1 $770,000 1 $424,000 1 25.54% 43.79% d. CFo C01 F01 C02 F02 C03 F03 IRR CPT 7.14% -$1,035,000 $657,000 1 $164,000 1 $343,000 1 MY QUESTION: Consider the following cash flows of two mutually exclusive projects for Spartan Rubber Company. Assume the discount rate for Spartan Rubber Company is 10 percent. Year 0 1 2 3 Dry Prepreg 1,780,00 -$ 0 1,108,00 0 916,000 758,000 Solvent Prepreg -$ 790,000 415,000 680,000 406,000 a. What is the payback period for each project? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).) Payback period years Dry Prepreg years Solvent Prepreg b. What is the NPV for each project? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).) NPV $ Dry Prepreg $ Solvent Prepreg c. What is the IRR for each project? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places (e.g., 32.16).) IRR Dry Prepreg Solvent Prepreg % % d. Calculate the incremental IRR for the cash flows. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).) Incremental IRR %