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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: 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 regular and discounted paybacks. Which project looks better when judged by the paybacks? i. If the payback was the only method a firm used to accept or reject projects, what payback should it choose as the cutoff point, that is, reject projects if their paybacks are not below the chosen cutoff? Is your selected cutoff based on some economic criteria, or is it more or less arbitrary? Are the cutoff criteria equally arbitrary when firms use the NPV and/or the IRR as the criteria? Explain. j. Define the MIRR. What’s the difference between the IRR and the MIRR, and which generally gives a better idea of the rate of return on the investment in a project? Explain. k. Why do most academics and financial executives regard the NPV as being the single best criterion and better than the IRR? Why do companies still calculate IRRs?

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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781337395250
BuyFind

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781337395250

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Chapter
Section
Chapter 11, Problem 23SP
Textbook Problem

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:

Chapter 11, Problem 23SP, CAPITAL BUDGETING CRITERIA Your division is considering two projects. Its WACC is 10%, and the

  1. a. Calculate the projects’ NPVs, IRRs, MIRRs, regular paybacks, and discounted paybacks.
  2. b. If the two projects are independent, which project(s) should be chosen?
  3. c. If the two projects are mutually exclusive and the WACC is 10%, which project(s) should be chosen?
  4. d. Plot NPV profiles for the two projects. Identify the projects’ IRRs on the graph.
  5. 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.
  6. f. The crossover rate is 13.5252%. Explain what this rate is and how it affects the choice between mutually exclusive projects.
  7. g. Is it possible for conflicts to exist between the NPV and the IRR when independent projects are being evaluated? Explain your answer.
  8. h. Now look at the regular and discounted paybacks. Which project looks better when judged by the paybacks?
  9. i. If the payback was the only method a firm used to accept or reject projects, what payback should it choose as the cutoff point, that is, reject projects if their paybacks are not below the chosen cutoff? Is your selected cutoff based on some economic criteria, or is it more or less arbitrary? Are the cutoff criteria equally arbitrary when firms use the NPV and/or the IRR as the criteria? Explain.
  10. j. Define the MIRR. What’s the difference between the IRR and the MIRR, and which generally gives a better idea of the rate of return on the investment in a project? Explain.
  11. k. Why do most academics and financial executives regard the NPV as being the single best criterion and better than the IRR? Why do companies still calculate IRRs?

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Chapter 11 Solutions

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Ch. 11 - How are project classifications used in the...Ch. 11 - What are three potential flaws with the regular...Ch. 11 - Why is the NFV of a relatively long-term project...Ch. 11 - What is a mutually exclusive project? How should...Ch. 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 - NPV Project L costs 65,000, its expected cash...Ch. 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 - DISCOUNTED PAYBACK Refer to problem 11-1. What is...Ch. 11 - NPV Your division is considering two projects with...Ch. 11 - CAPITAL BUDGETING CRITERIA A firm with a 14% WACC...Ch. 11 - CAPITAL BUDGETING CRITERIA: ETHICAL CONSIDERATIONS...Ch. 11 - CAPITAL BUDGETING CRITERIA: ETHICAL CONSIDERATIONS...Ch. 11 - CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE...Ch. 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 - CAPITAL BUDGETING CRITERIA A company has an 11%...Ch. 11 - NPV AND IRR A store has 5 years remaining on its...Ch. 11 - MULTIPLE IRRS AND MIRR A mining company is...Ch. 11 - NPV A project has annual cash flows of 5,000 for...Ch. 11 - MIRR Project A costs 1,000, and its cash flows are...Ch. 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...

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