Using Excel, complete the following problems in your textbook:
- Payback and Discounted Payback: Problems 1, 3, and 4 on page 305
- Average Accounting Return: Problem 6 on page 306
- Net Present Value: Problem 8 on page 306
- IRR and MIRR: Problems 7 and 19 on pages 306 and 308
- Profitability Index: Problems 15 and 16 on page 307
- Comparing Investment Criteria: Problem 17 on page 308
Page 305
Question 1. Calculating Payback[LO2] What is the payback period for the following set of cash flows?
Year |
Cash Flow |
0 |
−$7,600 |
1 |
1,900 |
2 |
2,900 |
3 |
2,300 |
4 |
1,700 |
Question 3. Calculating Payback[LO2] Siva, Inc., imposes a payback cutoff of three years for its international investment projects. If the company has the following two projects available, should it accept either of them?.
Year |
Cash Flow (A) |
Cash Flow (B) |
0 |
−$45,000 |
−$ 55,000 |
1 |
16,000 |
13,000 |
2 |
21,000 |
15,000 |
3 |
15,000 |
24,000 |
4 |
9,000 |
255,000 |
Question 4. Calculating Discounted Payback[LO3] An investment project has annual cash inflows of $2,800, $3,700, $5,100, and $4,300, for the next four years, respectively. The discount rate is 14 percent. What is the discounted payback period for these cash flows if the initial cost is $5,200? What if the initial cost is $5,400? What if it is $10,400
Page 306
Question6. Calculating AAR[LO4] You’re trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of $15 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of $1,754,000, $1,820,500, $1,716,300, and $1,097,400 over these four years, what is the project’s average accounting return (AAR)?
Question 7. Calculating IRR[LO5] A firm evaluates all of its projects by applying the IRR rule. If the required return is 14 percent, should the firm accept the following project?
Year |
Cash Flow |
0 |
−$26,000 |
1 |
11,000 |
2 |
14,000 |
3 |
10,000 |
Question 8. Calculating NPV[LO1] For the cash flows in the previous problem, suppose the firm uses the NPV decision rule. At a required return of 11 percent, should the firm accept this project? What if the required return is 24 percent?
Page 307
Question 15. Calculating Profitability Index[LO7] What is the profitability index for the following set of cash flows if the relevant discount rate is 10 percent? What if the discount rate is 15 percent? If it is 22 percent?
Year |
Cash Flow |
0 |
−$15,300 |
1 |
9,400 |
2 |
7,600 |
3 |
4,300 |
Question 16.Problems with Profitability Index[LO1,7] The Sloan Corporation is trying to choose between the following two mutually exclusive design projects:
Year |
Cash Flow (I) |
Cash Flow (II) |
0 |
−$51,000 |
−$14,400 |
1 |
24,800 |
7,800 |
2 |
24,800 |
7,800 |
3 |
24,800 |
7,800 |
1. If the required return is 10 percent and the company applies the profitability index decision rule, which project should the firm accept?
2. If the company applies the NPV decision rule, which project should it take?
3. Explain why your answers in (a) and (b) are different.
Page 308
Question 17. Comparing Investment Criteria[LO1,2,3,5,7] Consider the following two mutually exclusive projects:
Year |
Cash Flow (A) |
Cash Flow (B) |
0 |
−$455,000 |
−$65,000 |
1 |
58,000 |
31,000 |
2 |
85,000 |
28,000 |
3 |
85,000 |
25,000 |
4 |
572,000 |
19,000 |
Whichever project you choose, if any, you require a return of 11 percent on your investment.
1. If you apply the payback criterion, which investment will you choose? Why?
2. If you apply the discounted payback criterion, which investment will you choose? Why?
3. If you apply the NPV criterion, which investment will you choose? Why?
4. If you apply the IRR criterion, which investment will you choose? Why?
5. If you apply the profitability index criterion, which investment will you choose? Why?
6. Based on your answers in (a) through (e), which project will you finally choose? Why?
Question 19. MIRR[LO6] RAK Corp. is evaluating a project with the following cash flows:
Year |
Cash Flow |
0 |
−$41,000 |
1 |
15,700 |
2 |
19,400 |
3 |
24,300 |
4 |
18,100 |
5 |
−9,400 |
The company uses an interest rate of 10 percent on all of its projects. Calculate the MIRR of the project using all three methods.