Concept explainers
a)
To determine:
The
Introduction:
The difference between the present value of cash inflows and the present value of
b)
To determine:
Rank the projects based on NPV values.
Introduction:
The difference between the present value of cash inflows and the present value of cash outflows over a period of time is known as the Net Present value.
c)
To determine:
The
Introduction:
Internal Rate of Return is a measure used in the capital budgeting which estimates the profitability of potential investments. IRR is computed as a discount rate that makes the net present value of all cash flows from an investment as zero.
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Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
- m. Jana is interested in establishing a new division that will focus primarily on developing new Internet-based projects. In trying to determine the cost of capital for this new division, you discover that specialized firms involved in similar projects have, on average, the following characteristics: Their capital structure is 10% debt and 90% common equity; their cost of debt is typically 12%; and they have a beta of 1.7. Given this information, what would your estimate be for the new divisions cost of capital?arrow_forwardThe Suboptimal Glass Company uses a process of capital rationing in its decision making. The firm's cost of capital is 14 percent. It will invest only $50, 500 this year. It has determined the IRR for each of the following projects: Project Project Size Internal Rate of Return A $ 10, 100 17.0% B 30, 300 16.0 C 25,250 15.0 D 10, 100 17.5 E 10, 100 18.0 F 20, 200 24.0 G 15,150 12.0 a. Pick out the projects that the firm should accept. (You may select more than one answer. Click the box with a check mark for the correct answer and click to empty the box for the wrong answer.) check all that apply 1 Project Bunanswered Project Cunanswered Project Dunanswered Project Eunanswered Project Funanswered Project Gunanswered Project Aunanswered b. If projects E and F are mutually exclusive, how would that affect your overall answer? That is, which projects would you accept in spending the $ 50, 500? (You may select more than one answer. Click the box with a check mark for the correct answer and…arrow_forwardA firm utilizes a strategy of capital rationing, which is currently $375,000 and is considering the following two projects: Project A has a cost of $335,000 and the following cash flows: year 1$140,000; year 2$150,000; and year 3$100,000. Project B has a cost of $365,000 and the following cash flows: year 1$220,000; year 2$110,000; and year 3$150,000. Using a 6% cost of capital, which decision should the financial manager make? Multiple Choice Do not select either project. Select project B. Select project A. Select both projecarrow_forward
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- A sky resort is studying a half a dozen capital improvement projects.It has collected shs.1 million for capital budgeting purposes.The following proposals and assosciated probability =indexes have been determined.The projects themselves are independent of one another. Project Amount Profitability A 500000 1.21 B 150000 0.95 C 350000 1.20 D 450000 1.18 E 200000 1.20 F 400000 1.05 a)With strict capital rationing,which of these investements should be undertaken? b)Is this an optimal strategy,why?arrow_forwardYour firm is looking at 3 projects, each costing $500,000: A is estimated to save $125,000 per year for 5 years; B is estimated to save $75,000 for 6 years plus generate tax savings of $20,000 per year; C is estimated to save $75,000 per year for 10 years but requires additional corporate overhead of $10,000 per year. (a) Compare the cash flows for the 3 projects and choose all that will meet your decision rule at a corporate cost of capital of 12.0 %. (b) What changes if the cost of capital rises to 15.0%? (c) If we deduct income taxes of 25% on the net savings; does this change your results? (d) if 2 projects like these both have acceptable NPV but only 1 can be accepted, which one do you select?arrow_forwardOakmont Company has an opportunity to manufacture and sell a new product for a four-year period. After careful study, Oakmont estimated the following costs and revenues for the new product: (Attached table) When the project concludes in four years the working capital will be released for investment elsewhere within the company. Required: Using Excel (this will save you time and effort) answer the following: Oakmont’s cost of capital is 15%, and management does not feel it should have any adjustment for risk, compute the NPV. Same situation as (a), but management does feel this project does possess a greater than average risk, so 19% should be the required rate of return. Compute the NPV. Management thinks that if they can spend another $10,000 on advertising each of the next 4 years (at the end of the year), it will cause sales volume to increase by 10% for each of the next 4 years. (Assume all cash flows occur at the end of the year) Compute NPV using a 15% cost of capital.arrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT