2 QUESTION 2A company has EUR10,000 in cash, and debt with face value EUR50,000 due next year. The company has the possibility to invest in a project, which requires an investment ofall of its cash. The project is expected to produce a cash flow next year of EUR100,000 with probability 5 percent, and EUR10,000 otherwise. Assume a discount rate of 20percent throughout. By implementing the project versus doing nothing, which statements are correct?The value of the firm decreasesThe value of debt decreasesThe value of the firm increasesOThe value of equity decreasesThe value of debt increases

Value of firm increases, if Net present value of project is positive. Net present value is present…

Answered: n face value EUR50,000 due next year.…

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 22E

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Redbird Company is considering a project with an initial investment of $265,000 in new equipment that will yield annual net cash flows of $45,800 each year over its seven-year life. The companys minimum required rate of return is 8%. What is the internal rate of return? Should Redbird accept the project based on IRR?
Assume that an investment of 100,000 produces a net cash flow of 60,000 per year for two years. The discount factor for year 1 is 0.89 and for year 2 is 0.80. The NPV is a. 0 b. 6,800 c. 1,400 d. (4,000)
Inflation Adjustments The Rodriguez Company is considering an average-risk investment in a mineral water spring project that has a cost of $150,000. The project will produce 1,000 cases of mineral water per year indefinitely. The current sales price is $138 per case, and the current cost per case is $105. The firm is taxed at a rate of 34%. Both prices and costs are expected to rise at a rate of 6% per year. The firm uses only equity, and it has a cost of capital of 15%. Assume that cash flows consist only of after-tax profits, because the spring has an indefinite life and will not be depreciated. Should the firm accept the project? (Hint: The project is a growing perpetuity, so you must use the constant growth formula to find its NPV.) Suppose that total costs consisted of a fixed cost of $10,000 per year plus variable costs of $95 per unit, and only the variable costs were expected to increase with inflation. Would this make the project better or worse? Continue to assume that the sales price will rise with inflation.

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n face value EUR50,000 due next year. Th a cash flow next year of EUR100,000 with ersus doing nothing, which statements are