Midwest Water Works estimates that its WACC is 10.44%. The company is considering the following capital budgeting projects. Assume that each of these projects is just as risky as the firm's existing assets and that the firm may accept all the projects or only some of them. Which set of projects should be accepted? Project Size Rate of Return A $1 million 12.0% |-Select- 2 million 11.5 |-Select- 2 million 2 million 1 million C 11.2 |-Select- D 11.0 -Select- 10.7 -Select- F 1 million 10.3 |-Select- 1 million 10.2 |-Select-

Midwest Water Works estimates that its WACC is 10.44%. The company is considering the following capital budgeting projects. Assume that each of these projects is just as risky as the firm's existing assets and that the firm may accept all the projects or only some of them. Which set of projects should be accepted? Project Size Rate of Return A $1 million 12.0% |-Select- 2 million 11.5 |-Select- 2 million 2 million 1 million C 11.2 |-Select- D 11.0 -Select- 10.7 -Select- F 1 million 10.3 |-Select- 1 million 10.2 |-Select-

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 3TP: Would you rather have $7,500 today or at the end of 20 years after it has been invested at 15%?...

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Scenario Analysis Shao Industries is considering a proposed project for its capital budget. The company estimates the projects NPV is 12 million. This estimate assumes that the economy and market conditions will be average over the next few years. The companys CFO, however, forecasts there is only a 50% chance that the economy will be average. Recognizing this uncertainty, she has also performed the following scenario analysis: What are the projects expected NPV, standard deviation, and coefficient of variation?
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.
WACC AND OPTIMAL CAPITAL BUDGET Adams Corporation is considering four average-risk protects with the following costs and rates of return: Project Cost Expected Rate of Return 1 2,000 16.00% 2 3,000 15.00 3 5,000 13.75 4 2,000 12.50 The company estimates that it can Issue debt at a rate of rd = 10%, and its tax rate is 30%. It can issue preferred stock that pays a constant dividend of 500 per year at 4900 per share. Also, its common stock currently sells for 36.00 per share; the next expected dividend, D1 is 3.50; and the dividend is expected to grow at a constant rate of 6% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock. a. What is the cost of each of the capital components? b. What is Adams WACC? c. Only projects with expected returns that exceed WACC will be accepted. Which projects should Adams accept?
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?
Midwest Water Works estimates that its WACC is 10.5%. The companyis considering the following capital budgeting projects:Project Size Rate of ReturnA $1 million 12.0%B 2 million 11.5C 2 million 11.2D 2 million 11.0E 1 million 10.7F 1 million 10.3G 1 million 10.2Assume that each of these projects is just as risky as the firm’s existing assets and thatthe firm may accept all the projects or only some of them. Which set of projects should beaccepted? Explain.
Firm A has 11 equally risky capital budgeting projects, each costing $29.608 million and each having an expected rate of return of 8.25%. Firm A’s retained earnings breakpoint is $296.08 million. The firm’s WACC using retained earnings is 8.0% but increases to 8.5% if new equity must be issued. The company invests in projects where the expected return exceeds the cost of capital. How much capital should Firm A raise and invest?
epp Corporation is considering two projects of machinery that perform the same task. The required rate of return for these projects is RM12%. The projects’ expected cash flows are as follows: Year Machine MIR (RM) Machine ZA (RM) 0 (37,000) (37,000) 1 13,000 16,500 2 15,000 15,500 3 22,000 20,000 4 17,000 19,500 Based on the above information, you are required to make an analysis for the decision of Capital Budgeting based on the following techniques: 1、Payback Period… 2、Discounted Payback Period… 3、Net Present Value (NPV) … 4、Accounting Rate of Return…5、Internal Rate of Return…… 6、Profitability Index, PI……
Hampton Manufacturing estimates that its WACC is 12.5%.The company is considering the following 7 investment projects: a. Assume that each of these projects is independent and that each is just as risky as thefirm’s existing assets. Which set of projects should be accepted, and what is the firm’soptimal capital budget?b. Now assume that Projects C and D are mutually exclusive. Project D has an NPV of$400,000, whereas Project C has an NPV of $350,000. Which set of projects should beaccepted, and what is the firm’s optimal capital budget?c. Ignore part b and assume that each of the projects is independent but that managementdecides to incorporate project risk differentials. Management judges Projects B,C, D, and E to have average risk, Project A to have high risk, and Projects F and G tohave low risk. The company adds 2% to the WACC of those projects that are significantlymore risky than average, and it subtracts 2% from the WACC of those projectsthat are substantially less risky than…
Suppose Celestial Crane Cosmetics is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $3,000,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $375,000 Year 2 $450,000 Year 3 $425,000 Year 4 $475,000 Celestial Crane Cosmetics’s weighted average cost of capital is 10%, and project Beta has the same risk as the firm’s average project. Based on the cash flows, what is project Beta’s NPV? -$1,972,140 $1,356,550 -$1,643,450 -$4,643,450
Suppose Pheasant Pharmaceuticals is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $3,225,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $375,000 Year 2 $425,000 Year 3 $500,000 Year 4 $400,000 If Pheasant Pharmaceutical's weighted average cost of capital is 8%, what is the NPV for this project? Group of answer choices -$2,186,977 -$5,047,481 -$1,822,481 -$1,422,481
XYZ Corporation is considering a capital budgeting project and requires a detailed analysis. The company has provided youwith the following financial information and ratios:Return on Investment (ROI): 15%Payback Period: 3 yearsNet Present Value (NPV): R50,000Internal Rate of Return (IRR): 12%Cash Flows:Year 1: R20 000Year 2: R30 000Year 3: R40 0001.4 Calculate the ARR for XYZ Corporation. Assume depreciation is calculated on the straight-linemethod and that the project has a scrap value of R5000