FIN 300 Chapter Notes - Chapter 9: Payback Period, Cash Flow, Net Present Value

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blackwallaby774

15 Apr 2014

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Lo1 how to compute the net present value and why it is the best decision criterion. Lo2 the payback rule and some of its shortcomings. Lo3 the discounted payback rule and some of its shortcomings. Lo4 accounting rates of return and some of the problems with them. Lo5 the internal rate of return criterion and its strengths and weaknesses. Lo7 the profitability index and its relation to net present value. Answers to concepts review and critical thinking questions (lo2, 3) a payback period less than the project"s life means that the npv is positive for a zero discount rate, but nothing more definitive can be said. The discounted payback includes the effect of the relevant discount rate. Since discounted payback is calculated at the same discount rate as is npv, if npv is positive, the discounted payback period must be less than the project"s life.

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Cardinal company is considering a project which will require a $2,800,000 investment in equipment with a useful life of 5years. At the end of five years, the project will terminate and the equipment will be sold for its salvage value of $300,000. The company's discount rate is 14%. The project will provide net operating income each year as follows:

1-What is the project profitability index for this project? (Refer to Exhibit 11B-1 and Exhibit 11B-2 attached at the end of this assignment, to determine the appropriate discount factor(s) using the table. Round your final answer to the nearest dollar amount.)

2-What is the project’s payback period? (Round your answer to 2 decimal places.)

3-What is the project’s simple rate of return for each of the five years? (Round your answer to 2 decimal places. (i.e 0.1234 should be entered as 12.34%.)

4-If the company’s discount rate was 16% instead of 14%, would you expect the project's net present value to be higher than, lower than, or the same?

A. Same B. Lower C. Higher

5-If the equipment’s salvage value was $500,000 instead of $300,000, would you expect the project’s payback period to be higher than, lower than, or the same?

A. Lower B. Same C. Higher

6-If the equipment’s salvage value was $500,000 instead of $300,000, would you expect the project's net present value to be higher than, lower than, or the same?

A. Higher B. Same C. Lower

ceruleanhornet626

Quiz 1

Net Present Value

0 1 2 3 4 5

| | | | | |

-750 200 100 300 400 200

Discount Rate = 7%

a, Calculate the NPV (2 points)

b, Calculate the IRR.(1 point)

c, Should the project be accepted?Explain your answer by discussingNPV and IRR. (1 point)

d,Circle the correct answer.When calculating NPV, The HIGHER/LOWER the discount rate,the higher the NPV.(1 point)

e, Calculate the Payback Period for this Project.(2 points)

f, Calculate the Profitability Index for this project.(2 points)

g,Circle the correct answer.In general, the payback period of a project should be Greater/Less than the discounted payback period for that project. (1 point)

graysnail659

Iron Mountain Inc. has the opportunity to expand its product line but it will have to invest in a new piece of equipment. Plan A is a robotic machine that will cost $8,580,000 and is expected to result in annual net cash inflows of $1,500,000 over nine years, with zero residual value at the end of nine years. A second piece of equipment, called Plan B, will cost $7,980,000 and is expected to generate net cash inflows of $1,000,000 per year for nine years. Estimated residual value for Plan B is $1,075,000. Iron Mountain uses straight-line depreciation and requires an annual rate of return of 6%.

Note: At a 6% discount rate, the present value of annuity of $1 for 9 years is 6.802, and the present value of $1 for 9 years is 0.592.

Answer the following questions. Each question is worth 1 point.

1. Compute payback period (round answers to one decimal place):

a. Compute payback period for Plan A:

b. Compute payback period for Plan B:

Tries 0/10

2. Compute accounting rate of return (Calculate with three decimal places; for example, enter 11.8% as 0.118):

a. Compute accounting rate of return for Plan A:

b. Compute accounting rate of return for Plan B:

Tries 0/10

For questions 3 and 4, enter as a positive if positive NPV and negative if negative NPV.

3. Compute net present value for Plan A (round answer to the nearest dollar):

Tries 0/10

4. Compute net present value for Plan B (round answer to the nearest dollar):

Tries 0/10

5. What is the Internal Rate of Return (IRR) for Plan A? Enter as a % not decimal; e.g., 8.12 not .0812

Hint: The payback period for Plan A will be the factor to use in the PV of an annuity of $1 tables.

Tries 0/10

sangriasheep985

FIN 300 Chapter Notes - Chapter 9: Payback Period, Cash Flow, Net Present Value

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