Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 10, Problem 4PS
Project analysis True or false?
- a. Sensitivity analysis is unnecessary for projects with asset betas that are equal to zero.
- b. Sensitivity analysis can be used to identify the variables most crucial to a project’s success.
- c. If only one variable is uncertain, sensitivity analysis gives “optimistic” and “pessimistic” values for project cash flow and
NPV . - d. The break-even sales level of a project is higher when break-even is defined in terms of NPV rather than accounting income.
- e. Risk is reduced when most of the costs are fixed.
- f. Monte Carlo simulation can be used to help
forecast cash flows.
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Students have asked these similar questions
If the net present value (NPV) of a project is negative:
Group of answer choices
accepting the project will decrease the value of the firm.
the project is acceptable.
the project's discounted payback period is shorter than the useful life of the project.
the internal rate of return is high than the firm's required rate of return.
When the present value of the cash inflows exceeds the initial cost of a project, then the project should be :
A. rejected because NPV is negative.
B. accepted because NPV is greater than 1.
C. accepted because the profitability index is negative.
D. rejected because the internal rate of return is negative.
Which of the following statements is false?
The equivalent annual value of a project is equal to the net present value of a project held in perpetuity, divided by the required rate of return.
None of the given options is false.
Management may select a project with a lower net present value because qualitative factors may render the other project less attractive.
The rejection of positive net present value projects by management is inconsistent with the objective of maximising shareholder wealth.
Chapter 10 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 10 - Capital budgeting process True or false? a. The...Ch. 10 - Prob. 2PSCh. 10 - Prob. 3PSCh. 10 - Project analysis True or false? a. Sensitivity...Ch. 10 - Prob. 5PSCh. 10 - Real options True or false? a. Decision trees can...Ch. 10 - Prob. 7PSCh. 10 - Prob. 9PSCh. 10 - Prob. 10PSCh. 10 - Break-even analysis Break-even calculations are...
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Using IRR, a project is rejected if the IRR a. is equal to the required rate of return. b. is less than the required rate of return. c. is greater than the cost of capital. d. is greater than the required rate of return. e. produces an NPV equal to zero.arrow_forwardWhich of the following is FALSE regarding scenario analysis? Scenario analysis ignores diversification that exists if the project is part of a larger firm Scenario analysis provides a range of outcomes Scenario analysis assumes all "bad" values occur simultaneously and all "good" values occur simultaneously The decision rule for scenario analysis is to accept the project if the range of the outcomes is less than 30% of the base outcome Scenario analysis examines a best case, worst case, and base case situationarrow_forwardWhich of the following is CORRECT? Select one: a. If the NPV of a project is negative, the IRR for the project must also be negative. b. A project's MIRR can never exceed its IRR. c. If a project with normal cash flows has an IRR less than WACC, the project must have a positive NPV. d. If Project 1's IRR exceeds Project 2's IRR, then 1 must have a higher NPV than 2. e. If a project with normal cash flows has an IRR greater than WACC, the project must have a positive NPV. You purchase a house for $250,000. After you make your down payment of $50,000, you are financing $200,000 for 30 years at an annual percentage rate of 5.4%. How much are your monthly payments? Select one: a. Less than $1,000 b. Between $1,000 and $1,050 c. Between $1,050 and $1,100 d. Between $1,100 and $1,150 e. Greater than $1,200arrow_forward
- Which of the following is correct? • the shorter a projects payback period, the less desirable the project is normally considered to be by this criterion • one drawback of the payback criterion is that this method does not take account of cash flows beyond the payback period. • if a projects payback is postitive, then the project should be accepted because it must have a positive NPV • the regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem •one drawback of the discounted payback is that this method does not consider the time value of money, while the regular payback overcomes this drawback.arrow_forwardBETTER FORECASTING FOR LARGE CAPITAL PROJECTSLarge capital investments that are completed on schedule and within their budgets are probably the exception rather thanthe rule—and even when completed many fail to meet expected revenues. Executives often blame projectunderperformance on foreseeable complexities and uncertainties having to do with the scope of and demand for the project,the technology or project location, or even stakeholder opposition. No doubt, all of these factors at one time or anothercontribute to cost overruns, benefit shortfalls, and delays.But knowing that such factors are likely to crop up, why do project planners, on average, fail to forecast their effect on thecosts of complex projects? We’ve covered this territory before but continue to see companies making strategic decisionsbased on inaccurate data. Deliberately or not, costs are systematically underestimated, and benefits are overestimatedduring project preparation—because of delusions or honest mistakes on…arrow_forwardIf a net present value analysis for a normal project gives an NPV greater than zero, an internal rate of return calculation on the same project would yield an internal rate of return ____ the firm's cost of capital.a. greater thanb. less thanc. equal tod. cannot be determined from the information givenarrow_forward
- You should accept a project when the ?: net present value is negative. profitability index is positive. payback period exceeds the required period. AAR is greater than the required return. 7. Which one of the following statements is correct? The payback period is also referred to as the benefit-cost ratio. The internal rate of return can be reliably used for all independent projects. The profitability index is used when the investment funds are limited. The net present value should not be used to rank mutually exclusive projects. 8. You should accept a project when the ?: net present value is negative. profitability index is less than 1 but greater than 0. discounted payback period is less than the required period. AAR is less than the required return. 9. The crossover point ? : is used to determine which one of two internal rates of return for a project should be used when determining if a project should be accepted. 2. is the…arrow_forward12. Which of the following statements is CORRECT? Group of answer choices To find the MIRR, we discount the TV at the IRR. The discounted payback method eliminates all of the problems associated with the payback method. The IRR method appeals to some managers because it gives an estimate of the rate of return on projects rather than a dollar amount, which the NPV method provides. A project's NPV profile must intersect the X-axis at the project's WACC. When evaluating independent projects, the NPV and IRR methods often yield conflicting results regarding a project's acceptability.arrow_forwarda. If NPV is negative, company usually rejects the project. While, if ARR is greater than cost of capital, company accept the project. Last, if Profitability index is greater than 1, accept the project.b. If IRR on investment is zero, its annual cash flows is equal to its required investment. A• FF B• TT C• TF D• FTarrow_forward
- Answer the two questions below:a) What is the purpose of a project risk analysis, and why is it important in investment decision making?b) What is the difference between accounting break-even and NPV break-even? Which will offer the higher break-even level of output, and why?arrow_forwardWhich of the following statements is correct? a. Since investors prefer more return and less risk, one will never hold a dominated asset in the risk-return sense. In other words, if asset A has a higher expected return and lower standard-deviation than asset B, then investors would only hold asset A in their optimal portfolio. b. The IRR method correctly ranks mutually exclusive projects. c. When an investment project is evaluated today, the spending that occurred in the last year has to be included in the NPV analysis. d. The payback period criterion properly considers the time value of money. e. When there are two mutually exclusive projects, the project with the highest NPV should be chosen.arrow_forwardSuppose a firm uses a constant WACC in determining the value of capital budgeting projects rather than using a project beta. The firm will tend to A. accept profitable, low risk projects and reject unprofitable, high risk projects B. accept profitable, low risk projects and accept unprofitable, high risk projects C. reject profitable, low risk projects and accept unprofitable, high risk projects D. reject profitable , low risk projects and reject unprofitable, high risk projectsarrow_forward
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