Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)
8th Edition
ISBN: 9781285065137
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Question
Chapter 11, Problem 10P
Summary Introduction
To explain: Whether the project A or project B should be chosen.
Mutually Exclusive Projects:
It refers to the group of projects in which if one project is accepted, it will automatically imply the rejection of rest. It refers to those projects for which investment cannot be made together.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
CAPITAL BUDGETING CRITERIA Your division is considering two projects. Its WACC is 10%, and the projects’ after-tax cash flows (in millions of dollars) would be as follows:
REFER IMAGE
a. Calculate the projects’ NPVs, IRRs, MIRRs, regular paybacks, and discounted paybacks.b. If the two projects are independent, which project(s) should be chosen?c. If the two projects are mutually exclusive and the WACC is 10%, which project(s) should be chosen?d. Plot NPV profiles for the two projects. Identify the projects’ IRRs on the graph.e. If the WACC was 5%, would this change your recommendation if the projects were mutually exclusive? If the WACC was 15%, would this change your recommendation? Explain your answers.f. The crossover rate is 13.5252%. Explain what this rate is and how it affects the choice between mutually exclusive projects.g. Is it possible for conflicts to exist between the NPV and the IRR when independent projects are being evaluated? Explain your answer.h. Now look at the…
A firm has the following investment alternatives (refer to image):
Each investment costs $3,000; investments B and C are mutually exclusive, and the firm’s cost of capital is 8 percent.
a.) If the firm’s cost of capital had been 10 percent, what would be investment A’s internal rate of return?
b.) The payback method of capital budgeting selects which investment?Why?
Appelbaum Inc. is comparing several alternative capital budgeting projects as shown below:
Projects
A B C
Initial investment $80,000 $120,000 $160,000
Present value of net cash flows 90,000 110,000 200,000
Using the net present value, how many of the projects are available??
Group of answer choices
Chapter 11 Solutions
Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)
Ch. 11 - How are project classifications used in the...Ch. 11 - Prob. 2QCh. 11 - Why is the NFV of a relatively long-term project...Ch. 11 - Prob. 4QCh. 11 - If two mutually exclusive projects were being...Ch. 11 - Discuss the following statement: If a firm has...Ch. 11 - Why might it be rational for a small firm that...Ch. 11 - Project X is very risky and has an NPV of 3...Ch. 11 - What reinvestment rate assumptions are built into...Ch. 11 - A firm has a 100 million capital budget. It is...
Ch. 11 - Prob. 1PCh. 11 - IRR Refer to Problem 11-1. What is the projects...Ch. 11 - MIRR Refer to Problem 11-1. What is the projects...Ch. 11 - PAYBACK PERIOD Refer to Problem 11-1. What is the...Ch. 11 - Prob. 5PCh. 11 - NPV Your division is considering two projects with...Ch. 11 - CAPITAL BUDGETING CRITERIA A firm with a 14% VVACC...Ch. 11 - Prob. 8PCh. 11 - CAPITAL BUDGETING CRITERIA: ETHICAL CONSIDERATIONS...Ch. 11 - Prob. 10PCh. 11 - CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE...Ch. 11 - IRR AND NPV A company is analyzing two mutually...Ch. 11 - MIRR A firm is considering two mutually exclusive...Ch. 11 - CHOOSING MANDATORY PROJECTS ON THE BASIS OF LEAST...Ch. 11 - NPV PROFILES: TIMING DIFFERENCES An oil-drilling...Ch. 11 - NPV PROFILES: SCALE DIFFERENCES A company is...Ch. 11 - NPV AND IRR A store has 5 years remaining on its...Ch. 11 - Prob. 19PCh. 11 - Prob. 20PCh. 11 - Prob. 21PCh. 11 - MIRR A project has the following cash flows: This...Ch. 11 - CAPITAL BUDGETING CRITERIA Your division is...Ch. 11 - BASICS OF CAPITAL BUDGETING You recently went to...
Knowledge Booster
Learn more about
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
- A firm with a 14% WACC is evaluating two projects forthis year’s capital budget. After-tax cash flows, including depreciation, are as follows: a. Calculate NPV, IRR, MIRR, payback, and discounted payback for each project.b. Assuming the projects are independent, which one(s) would you recommend? c. If the projects are mutually exclusive, which would you recommend?d. Notice that the projects have the same cash flow timing pattern. Why is there a conflictbetween NPV and IRR?arrow_forwardCapital Budgeting Techniques Analyze the two independent projects, X and Y. Each project costs $10,000, and the firm’s required rate of return is 12%. The expected net cash flows are as follows: Outflows Inflows Projects Year 1 2 3 4 X -10,000 6,500 3,000 3,000 1,000 Y -10,000 3,500 3,500 3,500 5,500 Required: Calculate for each project: Payback Period IRR NPV PI Give your decision regarding acceptation and rejection of the project. Explain which criteria you based your decision upon and why?arrow_forwardPerform capital budgeting technique based on EquivalentAnnual Cost (EAC) to advise the Company Management which option should be chosen if therelevant discount rate is 9%?Costs Option A Option BInitial Investment 1,400,000 1,500,000Year 1 35,000 25,000Year 2 35,000 25,000Year 3 35,000 25,000Year 4 35,000 25,000Year 5 25,000arrow_forward
- CAPITAL BUDGETING CRITERIA A firm with a 14% WACC is evaluating two projects for this year’s capital budget. After-tax cash flows, including depreciation, are as follows: Time 0 1 2 3 4 5 Project A -6,000 $2,000 $2,000 $2,000 $2,000 $2,000 Project B -18,000 $5,600 $5,600 $5,600 $5,600 $5,600 a.Calculate NPV, IRR, MIRR, payback, and discounted payback for each project. b.Assuming the projects are independent, which one(s) would you recommend? c.If the projects are mutually exclusive, which would you recommend? d.Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRR? e.Which calculation would you recommend in your evaluation—NPV or IRR? Why?arrow_forwardA firm has a capital budget of $100 which must be spent on one of twoprojects, each requiring a present outlay of $100. Project A yields a returnof $120 after one year, whereas Project B yields $201.14 after 5 years.Calculate:(i) the NPV of each project using a discount rate of 10%;(ii) the IRR of each project.What are the project rankings on the basis of these two investmentdecision rules? Suppose that you are told that the firm’s reinvestmentrate is 12%, which project should the firm choose?Answer:(i)NPV(A) = 9.09; NPV(B) = 24.89, B>A(ii) IRR(A) = 20%; IRR(B) = 15%, A>BUsing a reinvestment rate of 12% the terminal values are TV(A) = 188.82; TV(B) = 201.14,hence B>A. Alternatively calculate the IRR of (B-A): IRR(B-A) = 13.78% > 12%, henceundertake the “extra project” (B-A) ie. undertake B.arrow_forwardHampton Manufacturing estimates that its WACC is 12.5%.The company is considering the following 7 investment projects: a. Assume that each of these projects is independent and that each is just as risky as thefirm’s existing assets. Which set of projects should be accepted, and what is the firm’soptimal capital budget?b. Now assume that Projects C and D are mutually exclusive. Project D has an NPV of$400,000, whereas Project C has an NPV of $350,000. Which set of projects should beaccepted, and what is the firm’s optimal capital budget?c. Ignore part b and assume that each of the projects is independent but that managementdecides to incorporate project risk differentials. Management judges Projects B,C, D, and E to have average risk, Project A to have high risk, and Projects F and G tohave low risk. The company adds 2% to the WACC of those projects that are significantlymore risky than average, and it subtracts 2% from the WACC of those projectsthat are substantially less risky than…arrow_forward
- Capital Budgeting Assume you are evaluating two mutually exclusive projects, the cash flows of which appear below and that your company uses a cost of capital of 13% to evaluate projects such as these. Time Project A Cash Flows Project B Cash Flows 0 -$46,800 -$63,600 1 -21,600 20,400 2 43,200 20,400 3 43,200 20,400 4 43,200 20,400 5 -28,800 20,400 Sketch the NPV profile for projects A & B.arrow_forwardProject Selection Midwest water works estimates that is WACC is 10.5%. The company is considering the following capital budgeting prokects: Project Size Rate of Return A $1 million 12.0% B 2 Million 11.5 c 2 million 11.2 D 2 million 11.0 E 1 million 10.7 F 1 million 10.3 G 1 Million 10.2 Assume that each of these projects is just as risky as the firm's existing assests and that the firm may accept all the projects or only some of them which set of projects should be accepted? Explain.arrow_forwardCapital Budgeting Assume you are evaluating two mutually exclusive projects, the cash flows of which appear below and that your company uses a cost of capital of 13% to evaluate projects such as these. Time Project A Cash Flows Project B Cash Flows 0 -$46,800 -$63,600 1 -21,600 20,400 2 43,200 20,400 3 43,200 20,400 4 43,200 20,400 5 -28,800 20,400 Calculate the payback period and discounted payback period for projects A & B.arrow_forward
- In an effort to increase its customer base, a company set the project MARR at exactly the WACC. If equity capital costs 9% per year and debt capital costs 11% for the project, what is the equity-debt percentage mix of capital required to make the WACC = 10%? The mix is __ % equity and __ % debt capital.arrow_forwardIn an effort to increase its customer base, a company set the project MARR at exactly the WACC. If equity capital costs 8% per year and debt capital costs 12.5% for the project, what is the equity-debt percentage mix of capital required to make the WACC = 10%?arrow_forwardCapital Budgeting Assume you are evaluating two mutually exclusive projects, the cash flows of which appear below and that your company uses a cost of capital of 13% to evaluate projects such as these. Time Project A Cash Flows Project B Cash Flows 0 -$46,800 -$63,600 1 -21,600 20,400 2 43,200 20,400 3 43,200 20,400 4 43,200 20,400 5 -28,800 20,400 Determine the crossover point for these projects’ NPV profiles.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Capital Budgeting Introduction & Calculations Step-by-Step -PV, FV, NPV, IRR, Payback, Simple R of R; Author: Accounting Step by Step;https://www.youtube.com/watch?v=hyBw-NnAkHY;License: Standard Youtube License