Ch. 8 - Week 6
- Tom’s Turtles is looking at a project with the estimated cash flows as follows:
Initial Investment at start of project: $3,600,000
Cash Flow at end of Year 1: $500,000
Cash Flow at end of Years 2 through 6: $625,000 each year
Cash Flow at end of Year 7 through 9: $530,000 each year
Cash Flow at end of Year 10: $385,000
The firm wants to know the Payback Period, NPV, and Profitability Index of this project. The appropriate discount rate for the project is 14%. If the cut-off period is six years for major projects, determine if the project is accepted or rejected under the three different decision models.
- You are a financial analyst for Stanton Corp. Your primary responsibility is to evaluate and recommend projects that the firm should undertake. Your CFO has indicated to you that the firm will have $2 million available for new projects in the upcoming year. Your divisional managers have submitted four proposals for consideration. You have calculated the relevant cash flows and IRRs for the four projects:
Project 1 2 3 4
0 -1 m -2 m -1 m -1 m
1 0.35m 1.3m 0.8m 0.3m
2 0.35m 0.9m 0.5m 0.4m
3 0.55m 0.65m 0.1m 0.9m
IRR 11.08% 23.04% 25.99% 22.56%
Which project(s) should the firm undertake? The firm’s hurdle rate is 12%.