please answer all questions Blue Moose Home Builders is evaluating a proposed capital budgeting project (project Sigma) that will require aninitial investment of $800,000.Blue Moose Home Builders has been basing capital budgeting decisions on a project's NPV; however, its new CFOwants to start using the IRR method for capital budgeting decisions. The CFO says that the IRR is a better methodbecause returns in percentage form are easier to understand and compare to required returns. Blue Moose HomeBuilders's WACC is 7%, and project Sigma has the same risk as the firm's average project.The project is expected to generate the following net cash flows:Which of the following is the correct calculation of projectYearCash FlowSigma's IRR?Year 1$375,00036.58%Year 2$500,00032.51%Year 3$425,00034.54%Year 4$500,00040.64%If this is an independent project, the IRR method states that the firm shouldreject project Sigmaaccept project SigmaIf mutually exclusive projects are proposed that both have an IRR greater than the necessary WACC, the IRR methodstates that the firm should accept:The project that requires the lowest initial investment, assuming that both projects have the same risk as thefirm's average projectThe project with the greatest IRR, assuming that both projects have the same risk as the firm's averageprojectO The project with the greater future cash inflows, assuming that both projects have the same risk as the firm'saverage project

IRR is the rate of return a project is expected to generate over its lifespan. It is expressed in…

Blue Moose Home Builders is evaluating a proposed capital budgeting project (project Sigma) that will require an initial investment of $800,000. Blue Moose Home Builders has been basing capital budgeting decisions on a project's NPV; however, its new CFC wants to start using the IRR method for capital budgeting decisions. The CFO says that the IRR is a better metho because returns in percentage form are easier to understand and compare to required returns. Blue Moose Home Builders's WACC is 7%, and project Sigma has the same risk as the firm's average project. The project is expected to generate the following net cash flows:

Blue Moose Home Builders is evaluating a proposed capital budgeting project (project Sigma) that will require an initial investment of $800,000. Blue Moose Home Builders has been basing capital budgeting decisions on a project's NPV; however, its new CFC wants to start using the IRR method for capital budgeting decisions. The CFO says that the IRR is a better metho because returns in percentage form are easier to understand and compare to required returns. Blue Moose Home Builders's WACC is 7%, and project Sigma has the same risk as the firm's average project. The project is expected to generate the following net cash flows:

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 21P: Your division is considering two investment projects, each of which requires an up-front expenditure...

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Edelman Engineering is considering including two pieces of equipment, a truck and an overhead pulley system, in this year’s capital budget. The projects are independent. The cash outlay for the truck is $17,100, and that for the pulley system is $22,430. The firm’s cost of capital is 14%. After-tax cash flows, including depreciation, are as follows: Calculate the IRR, the NPV, and the MIRR for each project, and indicate the correct accept/reject decision for each.
There are two projects under consideration by the Rainbow factory. Each of the projects will require an initial investment of $35,000 and is expected to generate the following cash flows: Use the information from the previous exercise to calculate the internal rate of return on both projects and make a recommendation on which one to accept. For further instructions on internal rate of return in Excel, see Appendix C.
Would you rather have $7,500 today or at the end of 20 years after it has been invested at 15%? Explain your answer. The following are independent situations. For each capital budgeting project, indicate whether management should accept or reject the project and list a brief reason why.
Clearcast Communications Inc. is considering allocating a limited amount of capital investment funds among four proposals. The amount of proposed investment, estimated operating income, and net cash flow for each proposal are as follows: The companys capital rationing policy requires a maximum cash payback period of three years. In addition, a minimum average rate of return of 12% is required on all projects. If the preceding standards are met, the net present value method and present value indexes are used to rank the remaining proposals. Instructions 1. Compute the cash payback period for each of the four proposals. 2. Giving effect to straight-line depreciation on the investments and assuming no estimated residual value, compute the average rate of return for each of the four proposals. Round to one decimal place. 3. Using the following format, summarize the results of your computations in parts (1) and (2). By placing the computed amounts in the first two columns on the left and by placing a check mark in the appropriate column to the right, indicate which proposals should be accepted for further analysis and which should be rejected. 4. For the proposals accepted for further analysis in part (3), compute the net present value. Use a rate of 12% and the present value table appearing in Exhibit 2 of this chapter. 5. Compute the present value index for each of the proposals in part (4). Round to two decimal places. 6. Rank the proposals from most attractive to least attractive, based on the present values of net cash flows computed in part (4). 7. Rank the proposals from most attractive to least attractive, based on the present value indexes computed in part (5). 8. Based on the analyses, comment on the relative attractiveness of the proposals ranked in parts (6) and (7).
The Ulmer Uranium Company is deciding whether or not to open a strip mine whose net cost is $4.4 million. Net cash inflows are expected to be $27.7 million, all coming at the end of Year 1. The land must be returned to its natural state at a cost of $25 million, payable at the end of Year 2. Plot the project’s NPV profile. Should the project be accepted if r = 8%? If r = 14%? Explain your reasoning. Can you think of some other capital budgeting situations in which negative cash flows during or at the end of the project’s life might lead to multiple IRRs? What is the project’s MIRR at r = 8%? At r = 14%? Does the MIRR method lead to the same accept-reject decision as the NPV method?
Spencer Enterprises is attempting to choose among a series of new investment alternatives. The potential investment alternatives, the net present value of the future stream of returns, the capital requirements, and the available capital funds over the next three years are summarized as follows: Develop and solve an integer programming model for maximizing the net present value. Assume that only one of the warehouse expansion projects can be implemented. Modify your model from part (a). Suppose that if test marketing of the new product is carried out, the advertising campaign also must be conducted. Modify your formulation from part (b) to reflect this new situation.
There are two projects under consideration by the Rainbow factory. Each of the projects will require an initial investment or $28.000 and is expected to generate the following cash flows: If the discount rate is 5% compute the NPV of each project and make a recommendation of the project to be chosen.
Your division is considering two investment projects, each of which requires an up-front expenditure of 25 million. You estimate that the cost of capital is 10% and that the investments will produce the following after-tax cash flows (in millions of dollars): a. What is the regular payback period for each of the projects? b. What is the discounted payback period for each of the projects? c. If the two projects are independent and the cost of capital is 10%, which project or projects should the firm undertake? d. If the two projects are mutually exclusive and the cost of capital is 5%, which project should the firm undertake? e. If the two projects are mutually exclusive and the cost of capital is 15%, which project should the firm undertake? f. What is the crossover rate? g. If the cost of capital is 10%, what is the modified IRR (MIRR) of each project?