Answered: Projects S and L are equally risky,…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 7P

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Project S has a cost of $10,000 and is expected to produce benefits (cash flows) of $3,000 per year for 5 years. Project L costs $25,000 and is expected to produce cash flows of $7,400 per year for 5 years. Calculate the two projects’ NPVs, IRRs, MIRRs, and PIs, assuming a cost of capital of 12%. Which project would be selected, assuming they are mutually exclusive, using each ranking method? Which should actually be selected?
You must analyze two projects, X and Y. Each project costs$10,000, and the firm’s WACC is 12%. The expected cash flows are as follows:a. Calculate each project’s NPV, IRR, MIRR, payback, and discounted payback.b. Which project(s) should be accepted if they are independent?c. Which project(s) should be accepted if they are mutually exclusive?d. How might a change in the WACC produce a conflict between the NPV and IRR rankingsof the two projects? Would there be a conflict if WACC were 5%? (Hint: Plot theNPV profiles. The crossover rate is 6.21875%.)e. Why does the conflict exist?
The management of NUBD Co. is considering three investment projects-W, X, and Y. Project W would require an investment of P21,000, Project X of P66,000, and Project Y of P95,000. The present value of the cash inflows would be P22,470 for Project W, P73,920 for Project X, and P98,800 for Project Y.Rank the projects according to the profitability index, from most profitable to least profitable. Y,W,X X,Y,W X,W,Y W,Y,X
Central Energy is considering two mutually exclusive projects, Project Red and Project The projects have the following cash flows: Project Red Project White Year    Cash Flows      Cash Flows 0 -$1,000 -$1,000 1 100 700 2 200 400 3 600 200 4 800 100 Assume that both projects have a 10 percent WACC. What is the internal rate of return of the project that has the highest NPV? 18.24% 10.00% 21.83% 14.30% 21.96%
Burner Co. is considering two manually exclusive projects, Project A and Project B. the projects have the following cash flows:                                                 Project A                              Project B                                                                              Year                                       Cashflow                             Cashflow                                                                              0                                              -100,000                               -190,000                                                                               1                                              30,000                                   30,000                                                                                   2                                              35,000                                   35,000                                                                                   3…
Farmer Co. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and repeatable. Year                           0                1                2                3                4 CFS                          -$900         $800          $600                  CFL                          -$700         $300          $200          $400          $200 WACC: 10% Given the two projects are of different length and both are repeatable, one suggestion is to use the replacement chain approach in evaluation. If this approach is used, which project will you choose? Show the calculations and explain your decision.
BURNER Co. is considering two mutually exclusive projects, Project A and Project B. The projects have the following cash flows: Project A Project B -100,000 -190,000 30,000 30,000 35,000 35,000 40,000 100,000 40,000 100,000 The two projects are equally risky. At what weighted average cost of capital would the two projects have the same net present value (NPV)?
Flint Fruits is considering two equally risky, mutually exclusive projects, Projects A and B, that have the following cash flows: Year Project A Project B 0 -$100,000 -$97,000 1 60,000 30,000 2 25,000 15,000 3 60,000 80,000 4 40,000 65,000 What is the cost of capital that would make the two projects having the same NPV values?(Please show work) Discuss why this cost of capital that would make two projects have the same NPV value would influence your decision to take project A or project B based on NPV versus IRR method? (Please show work)
Masulis Inc. is considering a project that has the following cash flow and WACC data. What is the project's discounted payback? WACC: 10.75% Year 0 1 2 3 4 Cash flows -$975 $650 $610 $570 $530 a. 1.22 years b. 2.78 years c. 1.78 years d. 2.22 years e. 1.11 years Moerdyk & Co. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher IRR, how much value will be forgone? Note that under certain conditions choosing projects on the basis of the IRR will not cause any value to be lost because the one with the higher IRR will also have the higher NPV, i.e., no conflict will exist. WACC: 8.75% 0 1 2 3 4 CFS -$775 $550 $390 $230 $70 CFL -$775 $115 $275 $435 $595 a. $0.00 b. $37.51 c. $34.49…
Braun Industries has a WACC of 10% and is considering an investment project that has the following cash flows: Year Cash Flow 0 $600 1 $400 2 $300 What’s the project’s NPV given that WACC is 10%?What’s the project’s NPV if WACC is 20%?Based on the calculated NPVs in questions 12 and 13, what’s the estimated project’s IRR using interpolation method?Should the project be accepted based on IRR? Why?Should the project be accepted based on NPV? Why?
Moses Manufacturing is attempting to select the best of three mutually exclusive projects, X, Y, and Z. Although all the projects have 5-year lives, they possess differing degrees of risk. Project X is the most risky; Project Y is in the least risky; and Project Z is in between. The basic cash flow data for each project and the risk-adjusted discount rates (RADRs) used by the firm are shown in the following table Project X Project Y Project Z RADR 22.7% 13.3% 15.4% Initial investment ( CF0) $177,000 $238,000 $306,000 Year ( t ) Cash inflows (CFt) 1 $78,000 $55,000 $94,000 2 67,000 70,000 94,000 3 62,000 79,000 94,000 4 59,000 88,000 94,000 5 61,000 98,000 94,000 a) Find the risk-adjusted NPV for each project. a) the net present value for project X is $? b) Which project, if any, would you recommed that the firm udertake?
A firm has two mutually exclusive investment projects to evaluate. The projects have the following cash flows: Time After-tax Cash Flow X After-tax Cash Flow Y 0 -$100,000 -$75,000 1 30,000 40,000 2 50,000 40,000 3 60,000 40,000 4 - 40,000 5 - 5,000 Projects X and Y are equally risky and may be repeated indefinitely. If the firm’s WACC is 12%, what is the EAA of the project that adds the most value to the firm? Do not round intermediate calculations. Round your answer to the nearest dollar. Choose Project , whose EAA = $

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