Why would a company use the Internal Rate of Return versus the Payback method when evaluating investment options? What are the limitations of these two methods?
Web Field Trip
Go to the “Calculators” section of the FinAid website (http://www.finaid.org) at http://www.finaid.org/calculators/ . Click the College Cost Projector link under the “Costs” heading, and use the calculator to estimate the cost of your education until graduation (use a 7% tuition inflation rate).
Next, go to http://www.usatoday.com/news/nation/census/2002-07-18-degree-dollars.htm and read the article on how much more a college graduate earns over their earning life than a high school graduate.
Next, estimate how much more a college graduate earns each year versus a high school graduate. Estimate how long your working life is until retirement.
Finally, use your favorite search engine to find an online calculator to assist in calculating the net present value. Enter the cost of your estimated college education (as a negative–it is an investment you are spending money on). Estimate the life of your working career and pick an appropriate discount rate.
Be prepared to discuss your findings in the Discussion area.
This question is based on your Web Field Trip.
Is your investment in a college education a positive or negative NPV project? Does the NPV of your investment in education effectively measure the true value of an education?
Kingston, Inc. management is considering purchasing a new machine at a cost of $4,154,018. They expect this equipment to produce cash flows of $777,270, $779,537, $922,254, $1,052,101, $1,331,951, and $1,159,218 over the next six years. If the appropriate discount rate is 15 percent, what is the NPV of this investment? (Enter negative amounts using negative sign e.g. -45.25. Round answer to 2 decimal places, e.g. 15.25.)
The NPV is
Briarcrest Condiments is a spice-making firm. Recently, it developed a new process for producing spices. The process requires new machinery that would cost $2,142,658. have a life of five years, and would produce the cash flows shown in the following table.
What is the NPV if the discount rate is 12.71 percent? (Enter negative amounts using negative sign e.g. -45.25. Round answer to 2 decimal places, e.g. 15.25.)
Timeline Manufacturing Co. is evaluating two projects. The company uses payback criteria of three years or less. Project A has a cost of $961,967, and project B’s cost is $1,038,935. Cash flows from both projects are given in the following table.
|Year||Project A||Project B|
What are their discounted payback periods? (Round answers to 2 decimal places, e.g. 15.25. If discounted payback period exceeds life of the project, enter 0.00 for the answer.)
Discounted payback periods of project A ___________
Discounted payback periods of project B _____________
Which will be accepted with a discount rate of 8 percent? __________
Timeline should choose _____________
Compute the IRR on the following cash flow streams:
a. An initial investment of $26,568 followed by a single cash flow of $40,728 in year 6. (Round intermediate calculations to 4 decimal places, e.g. 1.2512 and final answer to 2 decimal places, e.g. 15.25%.)
b. An initial investment of $920,179 followed by a single cash flow of $1,495,024 in year 4. (Round intermediate calculations to 4 decimal places, e.g. 1.2512 and final answer to 2 decimal places, e.g. 15.25%.)
c. An initial investment of $1,804,620 followed by cash flows of $1,384,595 and $1,444,193 in years 2 and 4, respectively. (Round answer to 2 decimal places, e.g. 15.25%.)
Draconian Measures, Inc., is evaluating two independent projects. The company uses a 15.42 percent discount rate for such projects. The costs and cash flows for the projects are shown in the following table. What are their NPVs?
What are their NPVs? (Enter negative amounts using negative sign, e.g. -45.25. Round answer to 2 decimal places, e.g. 15.25.)
The NPV of project 1 is $______, and the NPV of Project 2 is $ ___________
|Year||Project 1||Project 2|
Calculate NPV and IRR of two projects. (Enter negative amounts using negative sign, e.g. -45.25. Round answer to 2 decimal places, e.g. 15.25 or 12.25%.)
NPV of project 2 is $_______
IRR of project 1 is _________%
IRR of project 2 is ________%
Which project should be accepted?
Jekyll and Hyde Corp. should accept
A. project 2
B. Neither project
C. project 1
The __________ capital budgeting technique is the most appropriate one to use.
*Internal rate of return
*accounting rate of return
*net present value
What rate should be used to calculate a project’s net present value?
*coupon interest rate on bonds
*cost of capital
*required rate of return on equity
*treasury bill rate
If a project’s IRR exceeds its ______, the project should be _____.
cost of capital rejected
cost of capital accepted
Boomer Biscuit Inc. needs to automate its production line. The project costs $275,000 and is expected to provide after-tax cash flows of $73,306 for eight years. Management estimates its cost of capital is 12 percent. What is the project’s MIRR?
The capital-budgeting process starts with a firm’s
All of the following represent examples of key reasons for making capital expenditures except
|replacing production equipment.|
|installing energy efficient bulbs throughout the company’s facilities.|
|floating a corporate bond issue.|
|renewal of a company’s fleet of delivery trucks.
Which of the following is not one of the steps necessary for conducting a capital budgeting analysis?
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