To identify: The WACC should be used or not to evaluate all its potential project even if they vary in risk and if WACC is not used the reasonable costs of capital for average, high, and low-risk projects.
Introduction:
Weighted Average Cost of Capital:
It is the weighted average cost of capital of all the sources through which the firm finances its capital. It is the rate that a company will pay to all for raising finance. It can be termed as firm’s cost of capital. The company raises money through various sources such as common stock,
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Chapter 10 Solutions
Mindtap Finance, 1 Term (6 Months) Printed Access Card For Brigham/houston's Fundamentals Of Financial Management, 15th
- The net present value (NPV) method estimates how much a potential project will contribute to Business ethics/Shareholders Wealth/Employee Benefits, and it is the best selection criterion. The Smaller/Larger the NPV, the more value the project adds; and added value means a Higher/Larger stock price. In equation form, the NPV is defined as: CFt is the expected net cash flow at Time t, r is the project's risk-adjusted cost of capital, N is its life, and cash outflows are treated as negative cash flows. The NPV calculation assumes that cash inflows can be reinvested at the project's risk-adjusted RD/RS/WACC. When the firm is considering independent projects, if the project's NPV exceeds zero the firm should Accept/Reject the project. When the firm is considering mutually exclusive projects, the firm should accept the project with the Lowest Positive/Lowest Negative/Highest Postive/ Highest Negative NPV.Quantitative Problem: Bellinger Industries is considering two projects for inclusion…arrow_forwardWhat is the typical discount rate used with the Net Present Value (NPV) when project risk is the same as firm risk? Which capital budgeting methods should managers of firms use to evaluate a project? Why?arrow_forwardThe firm should accept a project if: the profitability index is greater than or equal to 1. the payback period is less than the life of the investment. the internal rate of return is positive. the internal rate of return is greater than the accounting rate of return.arrow_forward
- Data table (Click on the following icon in order to copy its contents into a spreadsheet.) Cash Flow Today ($ millions) Project A -6 B с 2 25 L Cash Flow in One Year ($ millions) 22 5 - 8 <arrow_forwardYour firm is considering what has been estimated to be a positive NPV project (NPV > 0). What can you say or infer about the project's payback period, discounted payback method, IRR, profitability index, and accounting rate of return?arrow_forwardTreynor Industries is investing in a new project. The minimum rate of return the firm requires on thisproject is referred to as the:Select one:a. Internal rate of return.b. Expected return.c. Market rate of return.d. Cost of capital.e. Average arithmetic returnarrow_forward
- Internal rate of return For the project shown in the following table, calculate the internal rate of return (IRR). Then indicate, for the project, the maximum cost of capital that the firm could have and still find the IRR acceptable.arrow_forwardIf a capital project has a hurdle rate higher than its internal rate, then its profitability index isarrow_forwardConsider the relationship between a project’s net present value (NPV), its internal rate of return (IRR), and a company’s cost of capital. For each scenario that follows, indicate the relative value of the unknown. If cost of capital is unknown, indicate whether it would be higher or lower than the stated IRR. If NPV is unknown, indicate whether it would be higher or lower than zero. Project 1 is shown as an example.arrow_forward
- We should accept a project if the Net Present Value is positive and the Internal Rate of Return is higher than the cost of capital. What are the reasons for that, what this means?arrow_forwardYour firm is considering what has been estimated to be a positive NPV project (NPV > 0). What can you say or infer about the project's payback period, discounted payback method, IRR, profitability index, and accounting rate of return (Please be thorough)?arrow_forwardWhich of the following statements is CORRECT? a. The NPV profile graph for a normal project will generally have a positive (upward) slope as the life of the project increases. b. An NPV profile graph shows how a project's payback varies as the cost of capital changes. O c. An NPV profile graph is designed to give decision makers an idea about how a project's contribution to the firm's value varies with the cost of capital. d. An NPV profile graph is designed to give decision makers an idea about how a project's risk varies with its life. e. We cannot draw a project's NPV profile unless we know the appropriate WACC for use in evaluating the project's NPV.arrow_forward
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning