Concept explainers
(a)
Introduction:
To calculate:
The net present value.
Answer to Problem 3E
Net present value is $730,578.13.
Explanation of Solution
Initial investment = $1,600,000
Annual net cash flow = net income +
= $250,000 + $156,250
= $406,250
Present value of
Net present value = Present value of inflow of cash − Present value of outflow of cash
= $2,330,578.13 - $1,600,000
= $730,578.13
(b)
Introduction:
To state:
If the rate of IRR is more or less than 10%.
Explanation of Solution
Net present value is $730,578.13.
Since the Net present value is positive, IRR should be greater than the cost of capital of 10%.
(c)
Introduction:
Net present value is calculated as the difference between present cash inflows and present cash outflows. A positive value of NPV states that the investment is profitable and negative value of NPV states that the investment will result in a loss.
To calculate:
The net present value using 20% discount rate.
Answer to Problem 3E
Net present value is $40,272.5.
Explanation of Solution
Initial investment = $1,600,000
Annual net cash flow = net income + depreciation
= $250,000 + $156,250
= $406,250
Present value of cash flows:
Net present value = Present value of inflow of cash − Present value of outflow of cash
= $1,640,272.5 - $1,600,000
= $40,272.5
(d)
Introduction:
Internal
To estimate:
The IRR of the project.
Answer to Problem 3E
IRR is 19.13%.
Explanation of Solution
Year | Annual cash flow |
0 | ($1,600,000) |
1 | $406,250 |
2 | $406,250 |
3 | $406,250 |
4 | $406,250 |
5 | $406,250 |
6 | $406,250 |
7 | $406,250 |
8 | $406,250 |
IRR | 19.13% |
Formula used (in excel) = IRR [All the values of annual cash flow]
Want to see more full solutions like this?
Chapter 11 Solutions
Managerial Accounting
- Mf4. 1. Calculate the Payback period 2. Calculate the Net Present Value (NPV) of both projects 3. Calculate the Internal Rate of Return (IRR) of both projects 4. Critically discuss the merits of each investment appraisal method, then discuss the result of the evaluations you have made of the two projects and advise the company which project should be undertakenarrow_forwardFind the modified internal rate of return (MIRR) for a proposed project costing $12,513. Assume that the appropriate cost of capital for projects of this risk level, at this company is 10.96%, and the estimated cash flows for the life of the project are found in the table below. (If you calculate an MIRR of 20.22% , please enter 20.22- do not include the % symbol, and use at least two decimal places). Year 1 $7,261 Year 2 $4,832 Year 3 $9,441.2 Year 4 $13,000 Year 5 $12,638arrow_forwardK Internal rate of return and modified internal rate of return For the project shown in the following table,, calculate the internal rate of return (IRR) and modified internal rate of return (MIRR). If the cost of capital is 13.04%, indicate whether the project is acceptable according to IRR and MIRR. The project's IRR is %. (Round to two decimal places.) Data table (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) Initial investment (CFO) Year (t) $80,000 Cash inflows (CF₂) 1 $10,000 2345 $25,000 $10,000 $15,000 $45,000 Print Done -arrow_forward
- • The cash flows (CFs) of project A which you are considering to invest are given below. If the cost of capital of the project is 11%, would you accept the project based on Net Present Value method? Show the calculation to support your decision.arrow_forwardThe internal rate of return (IRR) on a project is the average annual rate of return provided by investing in the project. A. Explain this thoroughly. B. Give some example if you have any idea.arrow_forwardi. Calculate the Net Present Value (NPV) for this project. ii. Calculate the Internal Rate of Return (IRR)of this project. iii. Make a recommendation to your department manager concerning whether toprovide finance for this project.arrow_forward
- What are the internal rates of return (IRR) on the three projects? Does the IRR rule in this case give the same decision as NPV? How do you know? If the opportunity cost of capital is 11%, what is the profitability index for each project? Please analyze if, in general, decisions based on the profitability index are consistent with decisions based on NPV. What is the most generally accepted measure to choose between the projects? Please justify your answer. Project A -5000 +1000 +1000 +3000 0 B -1000 0 +1000 +2000 +3000 C -5000 +1000 +1000 +3000 +5000 I will need full analysis (qualitative examples and references citations and examples of relative current investments of big companies.arrow_forwardInternal rate of return For the project shown in the following table, , calculate the internal rate of return (IRR). Then indicate, for the project, the maximum cost of capital that the firm could have and still find the IRR acceptable. ..... The project's IRR is %. (Round to two decimal places.) Data table (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) Initial investment (CF,) $150,000 Year (t) Cash inflows (CF;) $35,000 $30,000 $35,000 $40,000 $50,000 1 2 3 4 5 Print Donearrow_forward(a) Calculate the payback period for each project. (b) Calculate the net present value (NPV) for each project. (c) Calculate the profitability index of each project. (d) Explain to the company which project should be implemented. Support your answer.arrow_forward
- A company is considering three alternative Investment projects with different net cash flows. The present value of net cash flows is calculated using Excel and the results follow. Potential Projects Present value of net cash flows (excluding initial investment) Initial investment Complete this question by entering your answers in the tabs below. a. Compute the net present value of each project. b. If the company accepts all positive net present value projects, which of these will It accept? c. If the company can choose only one project, which will it choose on the basis of net present value? Required A Required B Compute the net present value of each project. Potential Projects Project A Present value of net cash flows Initial investment Net present value Required C Project E Project C $10,685 (10,000)arrow_forwardInvestment Criteria. Consider the following information. Expected Net Cash Flows Year Project X 0 ($10,000) 1 6,500 2 3,500 3 3,000 4 1,000 Assume the discount rate is 10 percent. Calculate Project X’s discounted payback period. Should the project be accepted Calculate the profitability index. Should the project be accepted? Calculate the accounting rate of return. Should the project be accepted?arrow_forwardFrom the attached please answer a. Determine the initial outlay of the project.b. Calculate the annual after-tax operating cash flow for Years 1 -5.c. Determine the terminal year non-operating cash flow in year 5:d. Taking into consideration all the information given, determine the Net Present Value of the project and advice the company on whether to invest in the new line of product.e. What is the estimated Internal Rate of Return (IRR) of the project?f. Should the project be accepted based on the IRR? g. Calculate to the following for Pharmos considering its tax rate of 25 percent. i. Total Market Value for the Firm ii, After-tax cost of Loaniii. After-tax cost of Bondsiv. Cost of Equityv. Cost of Preferred Stockvi. Weighted Average Cost of Capital (WACC)arrow_forward
- Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College PubFinancial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning