FINANCE- Describe how NPV is calculated, and describe the information

QUESTION

Concept Questions1. Concerning NPV:a. Describe how NPV is calculated, and describe the information this measure providesabout a sequence of cash flows. What is the NPV criterion decision rule?b. Why is NPV considered a superior method of evaluating the cash flows from a project?Suppose the NPV for a project’s cash flows is computed to be $2,500. What does thisnumber represent with respect to the firm’s shareholders?(150 words)2. Concerning IRR:a. Describe how the IRR is calculated, and describe the information this measureprovides about a sequence of cash flows. What is the IRR criterion decision rule?b. What is the relationship between IRR and NPV? Are there any situations in whichyou might prefer one method over the other? Explain.c. Despite its shortcomings in some situations, why do most financial managers use IRRalong with NPV when evaluating projects? Can you think of a situation in which IRRmight be a more appropriate measure to use than NPV? Explain.(200 words)3. A major college textbook publisher has an existing finance textbook. The publisher isdebating whether to produce an “essentialized” version, meaning a shorter (and lower-priced)book. What are some of the considerations that should come into play?(150 words)Calculation Questions1. Garage, Inc., has identified the following two mutually exclusive projects:a. What is the IRR for each of these projects? Using the IRR decision rule, which projectshould the company accept? Is this decision necessarily correct?b. If the required return is 11 percent, what is the NPV for each of these projects? Whichproject will the company choose if it applies the NPV decision rule?c. Over what range of discount rates would the company choose project A? Project B? Atwhat discount rate would the company be indifferent between these two projects?Explain2. Consider the following two mutually exclusive projects:Whichever project you choose, if any, you require a return of 11 percent on your investment.1. If you apply the payback criterion, which investment will you choose? Why?2. If you apply the discounted payback criterion, which investment will you choose? Why?3. If you apply the NPV criterion, which investment will you choose? Why?4. If you apply the IRR criterion, which investment will you choose? Why?5. If you apply the profitability index criterion, which investment will you choose? Why?6. Based on your answers in (a) through (e), which project will you finally choose? Why?3. Dog Up! Franks is looking at a new sausage system with an installed cost of $540,000. Thiscost will be depreciated straight-line to zero over the project’s five-year life, at the end of whichthe sausage system can be scrapped for $80,000. The sausage system will save the firm$170,000 per year in pretax operating costs, and the system requires an initial investment innet working capital of $29,000. If the tax rate is 34 percent and the discount rate is 10 percent,what is the NPV of this project?(End of Assignment)

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