e) NPV calculations take into account the time value of money. Di with brief examples: (i) The time value of money. (ii) The three factors that contribute to the time value in investment appraisal.
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- The Pinkerton Publishing Company is considering two mutually exclusive expansion plans. Plan A calls for the expenditure of 50 million on a large-scale, integrated plant that will provide an expected cash flow stream of 8 million per year for 20 years. Plan B calls for the expenditure of 15 million to build a somewhat less efficient, more labor-intensive plant that has an expected cash flow stream of 3.4 million per year for 20 years. The firms cost of capital is 10%. a. Calculate each projects NPV and IRR. b. Set up a Project by showing the cash flows that will exist if the firm goes with the large plant rather than the smaller plant. What are the NPV and the IRR for this Project ? c. Graph the NPV profiles for Plan A, Plan B, and Project .Staten Corporation is considering two mutually exclusive projects. Both require an initial outlay of 150,000 and will operate for five years. The cash flows associated with these projects are as follows: Statens required rate of return is 10%. Using the net present value method and the present value table provided in Appendix A, which of the following actions would you recommend to Staten? a. Accept Project X and reject Project Y. b. Accept Project Y and reject Project X. c. Accept Projects X and Y. d. Reject Projects X and Y.Voyageur has two mutually exclusive projects under consideration. The required investment for each is $15,000. The required return on each is 6%. The cash flows are as follows Year 1 2 3 4 IRR PROJECT A $2,000 4,000 7,000 10,000 15.2% PROJECT B $8,000 6,000 4,000 2,000 16.1% a) By considering the cash flows produced by the two investments; which project do you select by using the NPV criterion? Which would be selected by using IRR? b) Why do NPV and IRR select different projects? c) Which project do you select and why
- Kayeu Ltd is evaluating the investment in two new projects X and Y which would generate the following expected net cashflows: Project X Project Y Year 1 320 000 190 000 Year 2 300 000 280 000 Year 3 280 000 290 000 Year 4 240 000 300 000 Year 5 200 000 320 000 Details of the initial invesment for the two projects X and Y are : $950 000 and $1 250 000 with life of 5 years each. Residual value for project X is $150 000 and for Project Y $250 000 The company has a cost of capital of 12% per annum. Discount factors Year 1 0.893 Year 2 0.797 Year 3 0.712 Year 4 0.636 Year 5 0.566 Required (a) Assume that each project will sell for its residual value at the end of five years evaluate each project using each of the following methods: (i) Payback (ii) Accounting rate of return (iii) Net present value (b) based upon your calculation above in (a) advise management which project should be picked.Investapp Ltd is considering whether to undertake one of two mutually exclusive projects, each of which would require the purchase of an asset costing £50,000, which would have a zero scrap value at the end of four years. Cost of capital is estimated at 10%. The cash flows associated with the two projects are as follows: Project X £ Project Y £ Initial investment 50,000 50,000 Net cash inflows: 40,000 30,000 20,000 20,000 30,000 20,000 30,000 30,000 Year 1 Year 2 Year 3 Year 4 Discount factors @ 10% Rate 10% Year 1.000 1 0.909 0.826 3 0.751 4 0.683 Required: For both projects: a) Calculate the (non-discounted) Payback Period. b) Calculate the Accounting Rate of Return (ARR) using initial investment c) Calculate the Net Present Value (NPV).Pepper Co is contemplating three available investment opportunities, the cash flows of which are given below. Project Initial investment Cash flow Y1 Y2 Y3 Y4 Y5 $000 $000 $000 $000 S000 $000 (125) 50 50 50 50 (120) 15 15 15 15 200 (170) 120 In each case the initial investment represents the purchase of plant and equipment whose realisable value will be 20% of initial cost, receivable in addition to the above flow at the end of the life of the project. 80 Required: For each of the three projects: (a) Calculate the accounting rate of return (based on the average investment method) (b) Calculate the payback period (c) Calculate the net present value using a discount rate of 10% (d) Calculate the internal rate of return
- Insigne Corporation is considering two investment projects (projects A and project B) that are mutually exclusive. Project A requires an initial cash out flow of $10,000,000 today and Project B requires an initial cash out flow of $15,000,000 today. The expected end-of-year cash inflows of each project are given in the following table: Year Cash Inflow project A Cash Inflow project B 1 3,500,000 7,500,000 2 6,000,000 8,000,000 3 6,000,000 4,000,000 4 9,000,000 4,500,000 Weighted average cost of capital is 13% for both projects. What is the IRR of each project? What is the NPV of each project? What is MIRR of each project? What is payback of each project? Which project should Insigne Corporation take? Please explain whyKayeu Ltd is evaluating the investment in two new projects X and Y which would generate the following expected net cashflows Project X Project Y Year 1 320 000 190 000 Year 2 300 000 280 000 Year 3 280 000 290 000 Year 4 240 000 300 000 Year 5 200 000 320 000 Details of the initial investment for the two projects X and Y are; $950 000 and $1 250 000 with life of 5 years Residual value for Project X is $150 000 and for Project Y is $250 000 The company has a cost of capital of 12% per annum. Discount factors Year 1 0.893 Year 2 0.797 Year 3 0.712 Year 4 0.636 Year 5 0.566 Required: (a) Assume that each project will sell for its residual value at the end of five years evaluate each project using each of the following methods: (i) Payback (ii) Accounting rate of return (iii) Net present value (b) Explain what is meant by internal rate of returnX construction is considering two projects to develop. The estimated net cash flow from each project is as follows:YearProject X ($)Project Y ($)1110,00075,000265,000150,0003100,00060,0004115,00055,000535,00060,000Total425,000400,000Each project requires an investment of $ 200,000. The cost of capital is 10%.Require toa) Calculate Net Present Value, Payback period, ARR and Profitability Index.b) Which Project is to be recommended to develop based on NPV, Profitability Index, Payback period and ARR? Suggest
- 1. A firm is considering three mutually exclusive expansion projects. Their initial cost is the same for the three of them in a value of €12,000, and the minimum required rate of return for the firm is 10%. The excpected cash flows for each project are: Years Project A Project B Project C 1 2 3 4 5 €6,500 €6,500 €6,500 €4,000 €4,000 €4,000 €4,000 €4,000 a) Which of the investments will the firm choose using: > Payback method > NPV IRR b) Would your response change if the firm's funds are unlimited? Explain.Pound Industries is attempting to select the best of three mutually exclusive projects. The initial investment and after-tax cash inflows associated with these projects are shown in the following table Cash flows Project A Project B Project CInitial investment (CF0) $60,000 $100,000 $110,000Cash inflows (CFt), t = 1 to 5 $20,000 $ 31,500 $ 32,500 x. Calculate the payback period for each project.y. Calculate the net present value (NPV) of each project, assuming that the firm has a cost of capital equal to 13%.Assume projects A and B are mutually exclusive. The respective cash flows for projects A and B are stated below: Project Year 0 Year 1 Year 2 Year 3 A $575,000 $373,000 $219,000 $185,000 $980,000 $395,000 $477,000 $339,000 If the discount rate, based on an investment of similar risk, is 10%, which of the projects should be accepted based on: (a) Payback period rule (b) NPV rule (c) IRR rule (d) Profitability Index criteria (10) (25) (15) (25) Note: Show your answers in tables and all calculations properly presented.