Fundamentals Of Corporate Finance, Tenth Standard Edition
10th Edition
ISBN: 9781121571938
Author: Westerfield, Jordan, 2013 Ross
Publisher: Mcgraw-Hill
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Chapter 14, Problem 3CRCT
Project Risk [LO5] If you can borrow all the money you need for a project at 6 percent, doesn’t it follow that 6 percent is your cost of capital for the project?
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4. Calculating Discounted Payback (LO3) An investment project has annual cash inflows of $4,200, $5.300, $6.100, and
$7,400, and a discount rate of 14%. What is the discounted payback period for these cash flows if the initial cost is $7.000?
What if the initial cost is $10,000? What if it is $13,000?
Consider the following two projects:
Cash flows
Project A
Project B
C0�0
−$ 240
−$ 240
C1�1
100
123
C2�2
100
123
C3�3
100
123
C4�4
100
a. If the opportunity cost of capital is 8%, which of these two projects would you accept (A, B, or both)?
b. Suppose that you can choose only one of these two projects. Which would you choose? The discount rate is still 8%.
c. Which one would you choose if the cost of capital is 16%?
d. What is the payback period of each project?
e. Is the project with the shortest payback period also the one with the highest NPV?
f. What are the internal rates of return on the two projects?
g. Does the IRR rule in this case give the same answer as NPV?
h. If the opportunity cost of capital is 8%, what is the profitability index for each project?
i. Is the project with the highest profitability index also the one with the highest NPV?
j. Which measure should you use to choose between the projects?
Calculating Flotation Costs [LO4] Suppose your company needs $24 million to build a new assembly line. Your target debt-equity ratio is .75. The flotation cost for new equity is 7 percent, but the flotation cost for debt is only 3 percent. Your boss has decided to fund the project by borrowing money because the flotation costs are lower and the needed funds are relatively small.a. What do you think about the rationale behind borrowing the entire amount?b. What is your company’s weighted average flotation cost, assuming all equity is raised externally?
Chapter 14 Solutions
Fundamentals Of Corporate Finance, Tenth Standard Edition
Ch. 14.1 - What is the primary determinant of the cost of...Ch. 14.1 - What is the relationship between the required...Ch. 14.2 - What do we mean when we say that a corporations...Ch. 14.2 - Prob. 14.2BCQCh. 14.3 - Why is the coupon rate a bad estimate of a firms...Ch. 14.3 - How can the cost of debt be calculated?Ch. 14.3 - How can the cost of preferred stock be calculated?Ch. 14.4 - Prob. 14.4ACQCh. 14.4 - Prob. 14.4BCQCh. 14.4 - Under what conditions is it correct to use the...
Ch. 14.5 - Prob. 14.5ACQCh. 14.5 - Prob. 14.5BCQCh. 14.6 - Prob. 14.6ACQCh. 14.6 - Prob. 14.6BCQCh. 14 - A firm has paid dividends of 1.02, 1.10, 1.25, and...Ch. 14 - Prob. 14.3CTFCh. 14 - Why is the tax rate applied to the cost of debt...Ch. 14 - What approach to a projects costs of capital...Ch. 14 - What is the flotation cost of equity for a firm...Ch. 14 - WACC [LO3] On the most basic level, if a firms...Ch. 14 - Book Values versus Market Values [LO3] In...Ch. 14 - Project Risk [LO5] If you can borrow all the money...Ch. 14 - Prob. 4CRCTCh. 14 - DCF Cost of Equity Estimation [LO1] What are the...Ch. 14 - SML Cost of Equity Estimation [LO1] What are the...Ch. 14 - Prob. 7CRCTCh. 14 - Cost of Capital [LO5] Suppose Tom OBedlam,...Ch. 14 - Company Risk versus Project Risk [LO5] Both Dow...Ch. 14 - Divisional Cost of Capital [LO5] Under what...Ch. 14 - Prob. 1QPCh. 14 - Prob. 2QPCh. 14 - Prob. 3QPCh. 14 - Prob. 4QPCh. 14 - Prob. 5QPCh. 14 - Prob. 6QPCh. 14 - Prob. 7QPCh. 14 - Prob. 8QPCh. 14 - Prob. 9QPCh. 14 - Prob. 10QPCh. 14 - Prob. 11QPCh. 14 - Prob. 12QPCh. 14 - Prob. 13QPCh. 14 - Prob. 14QPCh. 14 - Prob. 15QPCh. 14 - Prob. 16QPCh. 14 - Prob. 17QPCh. 14 - Prob. 18QPCh. 14 - Prob. 19QPCh. 14 - Prob. 20QPCh. 14 - Prob. 21QPCh. 14 - Prob. 22QPCh. 14 - Prob. 23QPCh. 14 - 24. Flotation Costs and NPV [LO3, 4]...Ch. 14 - Prob. 25QP
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- NPV versus IRR [LO1, 5] Consider the following two mutually exclusive projects: Year Cash Flow (X) Cash Flow (Y) O -$30,000 -$30,000 1 13,700 15,600 2 14,200 12,200 3 13,400 13,300 Page 313 Sketch the NPV profiles for X and Y over a range of discount rates from zero to 25 percent. What is the crossover rate for these two projects?arrow_forward5. Calculating Discounted Payback [LO3] An investment project costs $17,000 and has annual cash flows of $4,700 for six years. What is the discounted payback period if the discount rate is zero percent? What if the discount rate is 5 percent? If it is 19 percent? 306arrow_forward4. Calculating Discounted Payback [LO3] An investment project has annual cash inflows of $2,800, $3,700, $5,100, and $4,300, for the next four years, respectively. The discount rate is 11 percent. What is the discounted payback period for these cash flows if the initial cost is $5,200? What if the initial cost is $6,40o? What if it is $10,400?arrow_forward
- Yiu are asked to evaluate a capital project (in million 0 1. 2 3 4 Cash flows 75 12 15 39 30 required return 10.0% what is the npv what is the IRR what is the modified internal rate of return what is the payback period would you recommend this projectarrow_forwardSuppose that you could invest in the following projects but have only $24,480 to invest. Which projects would you choose? Project Cost NPV w $ 7,970 $ 3,000 x 10,990 7,530 y 8,500 4,280 z 6,750 3,890 You should invest in project(s)?arrow_forward3. Calculating Projected Net Income [LO1]A proposed new investment has projected sales of $585,000. Variable costs are 44 percent of sales, and fixed costs are $187,000; depreciation is $51,000. Prepare a pro forma income statement assuming a tax rate of 21 percent. What is the projected net income?arrow_forward
- Consider the following two projects: cash flows Project A Project B c0 -270 -2170 c1 115 143 c2 115 143 c3 115 143 c4 115 a. If the opportunity cost of capital is 10%, which of these 2 projects would you accept? b. Suppose that you can choose only one of these two projects. Which would you choose? The discount rate is still 10%. c. Which one would you choose if the cost of capital is 15%? d. What is the payback period for every project? e. Is the project with the shortest payback period also the one with the highest NPV? f. What are the internal rate of return on the two projects? g. Does the IRR rule in this case gives the same answer as NPV? h1. If the opportunity cost of capital is 10%, whats is the profitability index for each project? h2. Is the project with the highest profitability index also the…arrow_forwardYou have the chance to participate in a project that produces the following cash flows: Cash Flows ($) C0 C1 C2 −3,600 5,400 −10,800 If the opportunity cost of capital is 10%, what is the NPV of the project? Would you accept the offer?arrow_forward8. NPV profiles An NPV profile plots a project's NPV at various costs of capital. An example NPV profile is shown below: Identify the range of costs of capital that a firm would use to accept and reject this project, and answer the questions that follow. NPV (Dollars) 600 500 400 300 200 100 0 ← -100 -200 -300 A 2 4 6 8 10 12 14 16 DISCOUNT (REQUIRED) RATE (Percent) The project represented by triangle A should be B 18 20 This NPV profile demonstrates that as the cost of capital increases, the project's NPV ?arrow_forward
- 1) You are considering the following mutually exclusive projects: (15pts) 1 4. Project A -400 50 50 50 230 230 Project B -600 300 300 50 50 50 if the firm required return (WACC) is 10%: a. What is the NPV of project A? b. What is the IRR of project A? C. What is the NPV of project B? d. What is the IRR of project B? e. Which one you must select? a. b. C. d. e.arrow_forwardPm.3 Find out the profitability index (PI) of the following project assuming the required rate of return is 8%. Will you accept the project? Why? year 0 1 2 3 4 5 Cash Flow ($) -250,000 50,000 40,000 120,000 80,000 45,000 Group of answer choices Accept the project because the PI is equal to 1.06, which is larger than 0. Accept the project because the PI is equal to 0.98, which is larger than 0. Reject the project because the PI is equal to 1.06, which is larger than 1. Reject the project because the PI is equal to 0.98, which is lower than 1. Accept the project because the PI is equal to 1.06, which is larger than 1.arrow_forward5. NPV profiles An NPV profile plots a project's NPV at various costs of capital, labeled "A" and "B" in the graph. A project's NPV profile is shown as follows. Identify the range of costs (ranges labeled "A" and "B") of capital that a firm would use to accept and reject this project. NPV (Dollars) 400 300 200 A 100 В -100 -200 O 2 4 6 8 10 12 14 16 18 20 COST OF CAPITAL (Percent)arrow_forward
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