Corporate Finance

1062 WordsOct 3, 20125 Pages
Financial Management Assignment (10 Sep, 2012) ------------------------------------------------- Ch. 5: 1 (a-e), 4, 5, 7, 10, 11, 12, 15 ------------------------------------------------- FM1 Takumi KAWAI, Pham NGUYEN, Yang CHEN, Bi CHAO #1 a. What is the payback period on each of the following projects? Payback period: A 3 years, B 2 years, C 3years b. Given that you wish to use the payback rule with a cutoff period of two years, which projects would you accept? “B” Only B meetsthe given cutoff period. c. If you use a cutoff period of three years, which projects would you accept? “A, B, C” All the projects meet the given cutoff period, thus, every project (A, B, C) is acceptable. (In terms of NPV, since B has the…show more content…
The IRR of the incremental investment is 10.7%. The decision depends on whether this IRR is excess of the cost of capital. If the cost of capital is smaller than IRR of 10.7% (IRR > COC), then Project B should be taken. Otherwise (IRR < COC), Project A should be taken. #12 Mr. Cyrus Clops, the president of Giant Enterprises, has to make a choice between two possible investments: The opportunity cost of capital is 9%. Mr. Clops is tempted to take B, which has the higher IRR.
 a. Explain to Mr. Clops why this is not the correct procedure.
 His decision was based upon the IRR Rule, but comparing their NPVs at the cost of capital, Project A has a higher NPV. Therefore, he should have chosen Project A rather than Project B. b. Show him how to adapt the IRR rule to choose the best project. He can salvage the IRR rule by focusing on the IRR on the incremental flows. In this problem, Project B has smaller cash flow than Project A. The incremental flow can address whether it is worth making the additional investment in Project A. c.Show him that this project also has the higher NPV. The IRR on the incremental investment of 10% is in excess of the 9% opportunity cost of capital (IRR > COC). Therefore, he should prefer Project A to another one. #15 Borghia Pharmaceuticals has $1 million allocated for capital expenditures. Which of the following projects should the company accept to stay within the $1 million budget? How much does the budget limit cost the

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