1. What is the payback period for each project? ( Do not round intermediate calc
ID: 2777901 • Letter: 1
Question
1.
What is the payback period for each project? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
Should it accept either of them?
What is the project's IRR? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
If the required return is 12 percent, should the firm accept the project?
At a required return of 11 percent, what is the NPV of the project? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
At a required return of 22 percent, what is the NPV of the project? (Do not round intermediate calculations. A negative amount should be indicated by a minus sign. Round your answer to 2 decimal places (e.g., 32.16).)
$
4.
Kerron Company is presented with the following two mutually exclusive projects. The required return for both projects is 14 percent.
What is the IRR for each project? (Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).)
What is the NPV for each project? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
Global Toys, Inc., imposes a payback cutoff of three years for its international investment projects. Assume the company has the following two projects available.Explanation / Answer
Part -1: Payback period
Project A
Year
Cash Flow
Cumulative
0
-61000
-61000
1
25000
-36000
2
32600
-3400
3
27000
23600
4
13000
36600
Payback Period
2.1259259
Project B
Year
Cash Flow
Cumulative
0
-106000
-106000
1
27000
-79000
2
32000
-47000
3
27000
-20000
4
234000
214000
Payback Period
3.0854701
Payback period
Project A
2.126years
Project B
3.085years
Part -2 : IRR
161000 = 55000/ (1+r) + 84000/(1+r)^2 + 68000/(1+r)^3 .
By trial and error Method, for r=13%, we get,
55000/ (1+0.13) + 84000/(1+0.13)^2 + 68000/(1+0.13)^3 = 161584.3
Similarly, for r=14%, we get,
55000/ (1+0.14) + 84000/(1+0.14)^2 + 68000/(1+0.14)^3 = 158778.9
Now, we sum the absolute values of the closest returns:
(161584.3-161000) + (161000-158788.9) = 584.3+2211.11 = 2795.4
Now, we calculate the ratio with the smaller “r” (in this case 13%)
= 584.2/2795.5=0.21.
Therefore IRR for Project S = 13 +0.21 =13.21%
Internal rate of return 13.21%
With the rate of return at 12%, the firm should not accept the project since it is below the IRR
Part 3: NPV
NPV
Year
Cash Flow
Discounted Cash flow at 11%
0
-151000
-151000
1
65000
58558.55856
2
74000
60060.06006
3
58000
42409.10012
NPV is
10027.71873
Hence NPV for the project is $10027.72
At r =22% the NPV is as follows:
NPV
Year
Cash Flow
Discounted Cash flow at 22%
0
-151000
-151000
1
65000
53278.68852
2
74000
49717.81779
3
58000
31940.99947
NPV is
-16062.49422
Hence NPV for the project is -$16062.59
Part 4
IRR of the two projects
By trial and error method as described above in Part -2
We get
IRR of Project M = 36.13%
IRR of Project N =24.32%
NPV of Project M
NPV of Project M
Year
Cash Flow
Discounted Cash flow at 14%
0
-137000
-137000
1
63800
55964.91228
2
81800
62942.44383
3
72800
49137.92638
4
58800
34814.32031
NPV is
65859.6028
NPV of Project N
NPV of Project N
Year
Cash Flow
Discounted Cash flow at 14%
0
-358000
-358000
1
151000
132456.1404
2
183000
140812.5577
3
136000
91796.1262
4
113000
66905.07134
NPV is
73969.89561
NPV of Project M is $ 65859.60
NPV of Project N is $73969.90
Project A
Year
Cash Flow
Cumulative
0
-61000
-61000
1
25000
-36000
2
32600
-3400
3
27000
23600
4
13000
36600
Payback Period
2.1259259
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