The following are the cash flows of two projects

The following are the cash flows of two projects:

Year

Project A

Project B

0

−$250

−$250

1

130

150

2

130

150

3

130

150

4

130

a.

If the opportunity cost of capital is 10%, calculate the NPV for both projects. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Project

NPV

A

$

B

b.

Which of these projects is worth pursuing?

The following are the cash flows of two projects:

Year

Project A

Project B

0

−$400

−$400

1

230

300

2

230

300

3

230

300

4

230

a.

Calculate the NPV for both projects if the discount rate is 10%. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Project

NPV

A

$

B

b.

Suppose that you can choose only one of these projects. Which would you choose?

The following are the cash flows of two projects:

Year

Project A

Project B

0

–

$

370

–

$

370

1

200

270

2

200

270

3

200

270

4

200

If the opportunity cost of capital is 10%, what is the profitability index for each project? (Do not round intermediate calculations. Round your answers to 4 decimal places.)

Project

Profitability index

A

B

Is the project with the highest profitability index also the one with the highest NPV?

The following are the cash flows of two projects:

Year

Project A

Project B

0

−$400

−$400

1

230

300

2

230

300

3

230

300

4

230

What is the payback period of each project? (Round your answers to 2 decimal places.)

Project

Payback Period

A

years

B

years

A project that costs $3,100 to install will provide annual cash flows of $850 for each of the next 6 years.

Calculate the NPV if the discount rate is 11%. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

NPV

$

Is this project worth pursuing?

How high can the discount rate be before you would reject the project? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Discount rate

%

A new computer system will require an initial outlay of $23,000, but it will increase the firm’s cash flows by $4,600 a year for each of the next 8 years.

a.

Calculate the NPV and decide if the system is worth installing if the required rate of return is 9%. What if it is 14%? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.)

Rate of Return

NPV

Worth Installing

9%

$

14%

$

Here are the cash flows for a project under consideration:

C₀

C₁

C₂

−

$

7,920

+

$

5,820

+

$

20,040

a.

Calculate the project’s net present value for discount rates of 0, 50%, and 100%. (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations. Round your answers to the nearest whole dollar.)

Discount rate

Net present value

0%

$

50%

$

100%

$

b.

What is the IRR of the project? (Do not round intermediate calculations. Enter your answer as a whole percent.)

IRR

%

Here are the cash flows for a project under consideration:

C₀

C₁

C₂

−

$

7,920

+

$

5,820

+

$

20,040

a.

Calculate the project’s net present value for discount rates of 0, 50%, and 100%. (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations. Round your answers to the nearest whole dollar.)

Discount rate

Net present value

0%

$

50%

$

100%

$

b.

What is the IRR of the project? (Do not round intermediate calculations. Enter your answer as a whole percent.)

IRR

%

Here are the expected cash flows for three projects:

Cash Flows (dollars)

Project

Year:

0

1

2

3

4

A

−

5,800

+

1,200

+

1,200

+

3,400

0

B

−

1,800

0

+

1,800

+

2,400

+

3,400

C

−

5,800

+

1,200

+

1,200

+

3,400

+

5,400

a.

What is the payback period on each of the projects?

Project

Payback period

A

years

B

years

C

years

b.

If you use a cutoff period of 2 years, which projects would you accept?

c.

If you use a cutoff period of 3 years, which projects would you accept?

d-1.

If the opportunity cost of capital is 10%, calculate the NPV for projects A, B, and C. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.)

Project

NPV

A

$

B

$

C

$

d-2.

Which projects have positive NPVs?

e.

"Payback gives too much weight to cash flows that occur after the cutoff date." True or false?