Need assistance with questions 1 through 7
Page 3 of 3
Instructions
Answer the following questions and complete the following problems, as applicable:
You may solve the following problems algebraically, or you may use a financial calculator. If you choose to solve the problems algebraically, be sure to show your computations. If you use a financial calculator, show your input values.
Reference: Cornett, M. M., Adair, T. A., & Nofsinger J. (2016). M: Finance (3rd ed.). New York, NY: McGraw-Hill
•Question 1:
Refer to the table below to complete this question. "Compute the expected return given these three economic states, their likelihoods, and the potential returns."
Recalculate the expected return under a set of changed economic probabilities
Economic State | Probability | Return |
Fast Growth | 0.25 | 40% |
Slow Growth | 0.50 | 10% |
Recession | 0.25 | −4% |
•Question 2:
Describe the Net Present Value (NPV) method for determining a capital budgeting project's desirability. What is the acceptance benchmark when using NPV?
Identify the NPV method's strengths and weaknesses.
•Question 3:
What is the payback period statistic? What is the acceptance benchmark when using the payback period statistic?
Identify what problem of the Payback Period method is corrected by using the Discounted Payback Period method.
•Question 4:
Describe the Internal Rate of Return (IRR) method for determining a capital budgeting project's desirability. What is the acceptance benchmark when using IRR?
Explain how the NPV and IRR methods are similar and how they are different.
•Question 5:
Describe the Modified Internal Rate of Return (MIRR) method for determining a capital budgeting project's desirability. What are MIRR's strengths and weaknesses?
Explain the differences in the reinvestment rate assumption that distinguishes MIRR from IRR.
•Question 6:
Compute the NPV statistic for Project Y and tell [advise] whether the firm should accept or reject the project with the cash flows shown in the chart if the appropriate cost of capital is 10 percent.
Explain how decreases in the cost of capital lead to an increase in the number of approved projects.
Project Y
Time | 0 | 1 | 2 | 3 | 4 |
Cash Flow | -$6,000 | $3,350 | $4,180 | $1,520 | $300 |
•Question 7:
Compute the payback period statistic for Project X and recommend whether the firm should accept or reject the project with the cash flows shown in the chart if the maximum allowable payback is four years.
If the discounted payback period were computed, identify if it would be less than, equal to, or greater than the non-discounted payback period.
Project X
Time | 0 | 1 | 2 | 3 | 4 | 5 |
Cash Flow | -$1,450 | $250 | $380 | $620 | $1,000 | $100 |