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Problems with the IRR method Acme Oscillators is considering an investment project that has the following...
Acme Oscillators is considering an investment project that has the following rather unusual cash flow pattern....
Acme Oscillators is considering an investment project that has the following rather unusual cash flow pattern. Year Cash Flow 0 $100 1 −460 2 791 3 −602.6 4 171.6 a. Calculate the project's NPV at each of the following discount rates: 0%, 5%, 10%, 20%, 30%, 40%, 50%. b. What do the calculations tell you about this project's IRR? The IRR rule tells managers to invest if a project's IRR is greater than the cost of capital. If Acme Oscillators'...
Acme Oscillators is considering an investment project that has the following rather unusual cash flow pattern....
Acme Oscillators is considering an investment project that has the following rather unusual cash flow pattern. Year Cash Flow 0 $100 1 −460 2 791 3 −602.6 4 171.6 a. Calculate the project's NPV at each of the following discount rates: 30%, 40%, 50%. b. What do the calculations tell you about this project's IRR? The IRR rule tells managers to invest if a project's IRR is greater than the cost of capital. If Acme Oscillators' cost of capital is...
Problems with IRR White Rock Services Inc. has an opportunity to make an investment with the...
Problems with IRR White Rock Services Inc. has an opportunity to make an investment with the following projected cash flows. Year Cash Flow 0 $1,680,000 1 -3,885,000 2 2,225,021 a. Calculate the NPV at the following discount rates and plot an NPV profile for this investment: 0%, 5%, 7.5%, 10%, 15%, 20%, 22.5%, 25%, 30%. b. What does the NPV profile tell you about this investment's IRR? c. If the company follows the IRR decision rule and their cost of...
7) Which of the following statements is FALSE? A) The IRR investment rule will identify the...
7) Which of the following statements is FALSE? A) The IRR investment rule will identify the correct decision in many, but not all, situations. B) By setting the NPV equal to zero and solving for r, we find the IRR. C) If you are unsure of your cost of capital estimate, it is important to determine how sensitive your analysis is to errors in this estimate. D) The simplest investment rule is the NPV investment rule. 8) Which of the...
You are CEO of Rivet Networks, maker of ultra-high performance network cards for gaming computers, and...
You are CEO of Rivet Networks, maker of ultra-high performance network cards for gaming computers, and you are considering whether to launch a new product. The product, the killer X3000, will cost $892,000 to develop up front (year 0), and you expect revenues the first year of $809,000, growing to $1.41 million the second year, and then declining by 45% per year for the next 3 years before the product is fully obsolete. In years 1 through 5, you will...
14) Cedric is considering between two mutually exclusive projects. The following table gives the cash flows...
14) Cedric is considering between two mutually exclusive projects. The following table gives the cash flows of each project: 0 1 2 3 4 A -$50 25 20 20 15 B -$100 20 40 50 60 a. If your discount rate is 6%, what are the NPVs of the two projects? b. What are the IRRs of the two projects? c. Why do IRR and NPV rank the two projects differently? NPV IRR
8. Abandonment options Acme Co. is considering a four-year project that will require an initial investment of $15,...
8. Abandonment options Acme Co. is considering a four-year project that will require an initial investment of $15,000. The base-case cash flows for this project are projected to be $12,000 per year. The best-case cash flows are projected to be $19,000 per year, and the worst-case cash flows are projected to be -$3,000 per year. The company's analysts have estimated that there is a 50% probability that the project will generate the base-case cash flows. The analysts also think that...
Question 12: Feng Inc. is considering a project that has the following cash flow and cost...
Question 12: Feng Inc. is considering a project that has the following cash flow and cost of capital (r) data. r: 10.00% Year 0 1 2 3 Cash flows −$1,050 $450 $460 $470 What is the project's NPV?
Management is considering the following investment project: Project Alpha Project Alpha Capital Outlay $100,000 Cash Income...
Management is considering the following investment project: Project Alpha Project Alpha Capital Outlay $100,000 Cash Income p.a. $59,000 Cash Expenses p.a. (other than tax) 19,000 Depreciation p.a. 10,000 Economic Life 10 years Salvage Value Zero Tax Rate Payable (paid in year of income) 30% Required Rate of Return 20% Required: Calculate the following (you may use a financial calculator or software): The Net Profit after Tax for all years and the Annual Cash Flow. NPV, IRR, ARR, PBP
7) Which of the following statements is FALSE? A) The IRR investment rule will identify the correct decision in many, but not all, situations. B) By setting the NPV equal to zero and solving for r, we find the IRR. C) If you are unsure of your cost of capital estimate, it is important to determine how sensitive your analysis is to errors in this estimate. D) The simplest investment rule is the NPV investment rule. 8) Which of the...
You are CEO of Rivet Networks, maker of ultra-high performance network cards for gaming computers, and you are considering whether to launch a new product. The product, the killer X3000, will cost $892,000 to develop up front (year 0), and you expect revenues the first year of $809,000, growing to $1.41 million the second year, and then declining by 45% per year for the next 3 years before the product is fully obsolete. In years 1 through 5, you will...
14) Cedric is considering between two mutually exclusive projects. The following table gives the cash flows of each project: 0 1 2 3 4 A -$50 25 20 20 15 B -$100 20 40 50 60 a. If your discount rate is 6%, what are the NPVs of the two projects? b. What are the IRRs of the two projects? c. Why do IRR and NPV rank the two projects differently? NPV IRR
8. Abandonment options Acme Co. is considering a four-year project that will require an initial investment of $15,000. The base-case cash flows for this project are projected to be $12,000 per year. The best-case cash flows are projected to be $19,000 per year, and the worst-case cash flows are projected to be -$3,000 per year. The company's analysts have estimated that there is a 50% probability that the project will generate the base-case cash flows. The analysts also think that...
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