irr refer to problem 11-1. what is the project’s irr
Your first assignment in your new position equally banana financial
Your first assignment in your new position equally assistant financial analyst at Caledonia Products is to evaluate two new capital- budgeting proposals. Because this is your first consignment, you have been asked not only to provide a recommendation but also to respond to a number of questions aimed at assessing your understanding of the capital letter- budgeting process. This is a standard process for all new fiscal analysts at Caledonia, and it will serve to decide whether you are moved straight into the majuscule- budgeting analysis department or are provided with remedial training. The memorandum yous received outlining your assignment follows:
To: The New Financial Analysts
From: Mr. V. Morrison, CEO, Caledonia Products
Re: Capital- Budgeting Analysis
Provide an evaluation of two proposed projects, both with five- yr expected lives and identical initial outlays of $ 110,000. Both of these projects involve additions to Caledonia€™s highly successful Avalon product line, and every bit a issue, the required rate of return on both projects has been established at 12 percent. The expected free cash flows from each project are as follows:
In evaluating these projects, please respond to the following questions:
a. Why is the capital- budgeting process so important?
b. Why is it hard to find exceptionally profitable projects?
c. What is the payback menstruation on each project? If Caledonia imposes a 3- year maximum acceptable payback period, which of these projects should be accepted?
d. What are the criticisms of the payback period?
e. Determine the NPV for each of these projects. Should they be accustomed?
f. Describe the logic backside the NPV.
grand. Determine the PI for each of these projects. Should they be accepted?
h. Would you expect the NPV and PI methods to requite consistent accept/ reject decisions? Why or why not?
i. What would happen to the NPV and PI for each project if the required rate of return in-creased? If the required rate of render decreased?
j. Determine the IRR for each project. Should they exist accepted?
g. How does a change in the required rate of return affect the projection€™s internal rate of return?
l. What reinvestment rate assumptions are implicitly made by the NPV and IRR methods? Which one is better? You have also been asked for your views on 3 unrelated sets of projects. Each set of projects involves two mutually exclusive projects. These projects follow.
one thousand. Caledonia is because two investments with i- year lives. The more expensive of the two is the improve and will produce more savings. Presume these projects are mutually exclusive and that the required rate of return is 10 percent. Given the following free cash flows:
1. Summate the NPV for each projection. 2. Calculate the PI for each projection. 3. Calculate the IRR for each project.
4. If in that location is no upper-case letter- rationing constraint, which project should be selected? If there is a capital- rationing constraint, how should the decision exist made?
n. Caledonia is considering two boosted mutually exclusive projects. The free cash flows associated with these projects are every bit follows:
The required rate of return on these projects is 11 percent.
one. What is each projection€™s payback period?
2. What is each projection€™s NPV?
three. What is each project€™due south IRR?
iv. What has caused the ranking conflict?
five. Which project should be accepted? Why?
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