UT FIN 320F - 3.7 Alternate Methods - Problems (3 pages)

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3.7 Alternate Methods - Problems



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3.7 Alternate Methods - Problems

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Pages:
3
School:
University of Texas at Austin
Course:
Fin 320f - Foundations of Finance

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FIN320F Foundations of Finance 3 7 Alternate Decision Methods Problems 1 Amateur Access Inc sometimes uses the payback method to select capital projects The maximum acceptable payback period is two years Amateur is now faced with two mutually exclusive investment opportunities Project X and Project Y as shown below Initial Investment Operating Cash Inflows Year 1 Year 2 Year 3 Year 4 Year 5 Project Project X Y 10 000 10 000 5 000 5 000 1 000 100 100 3 000 4 000 3 000 4 000 3 000 a What is the payback period for each project 2 3 b According to the payback method which project s should Amateur accept X 2 Compute the NPV of each project using a discount rate of 9 If Amateur Access used the NPV approach to selecting capital projects which project s would the company implement What conclusion can you draw regarding the payback method versus the NPV method 296 3219 Project Y NPV includes all cash flows 3 Recompute the NPV of Project Y using a discount rate of 12 instead of 9 2247 a When the discount rate rises what happens to the Present Value Decrease tmpt17nezwotmpt17nezwo Page 1 of 3 Heidi Toprac 2017 FIN320F Foundations of Finance 3 7 Alternate Decision Methods Problems b When the discount rate rises what happens to the Net Present Value Decrease 4 Without doing any math answer the following question Is the IRR of Project Y greater than or less than 12 How do you know Higher 5 Calculate the IRR of Project Y Because Project Y s operating cash flows are not an annuity you must either use the irr function in your calculator or use Excel 20 6 6 Amateur Access is analyzing a separate project called Project Zed Project Zed requires an initial investment of 65 000 and will provide future cash inflows of 25 000 per year for four years a Given a WACC of 9 what is the NPV of Project Zed 15993 b Before you do any math answer the following Will the IRR of Project Zed be higher or lower than 9 How do you know Higher c What is the IRR of Project Zed Because the future cash flows



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