Chapter 16, Problem 20QA

Project A has the following estimated cash flows and present values:Year                        Cash flow $       Discount factor@ 12%       Present value $0   Cost                    (95 000)          1.0                                         (95 000) 1–5 Contributionper annum               50 000             3.605                                    180 250 1–5 Fixed costsper annum               (25 000)           3.605                                    (90 125) 5 Residual value       20 000             0.567                                    11 340   The benefit of using sensitivity analysis in an investment appraisal would be:

Suppose that, for a certain potential investment project, the optimistic, most likely, and pessimistic estimates are as shown in the accompanying table. Solve, a. What is the AW for each of the three estimation conditions? b. It is thought that the most critical factors are useful life and net annual cash flow. Develop a table showing the net AW for all combinations of the estimates forthese two factors, assuming all other factors to be at their most likely values.

Which of the following statements is CORRECT?  Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows .   a. A project’s NPV is generally found by compounding the cash inflows at the WACC to find the terminal value (TV), then discounting the TV at the IRR to find its PV .   b. The higher the WACC used to calculate the NPV, the lower the calculated NPV will be   c. If a project’s NPV is greater than zero, then its IRR must be less than the WACC .   d. If a project’s NPV is greater than zero, then its IRR must be less than zero.   e. The NPVs of relatively risky projects should be found using relatively low WACCs

Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.   a.  A project's NPV is generally found by compounding the cash inflows at the WACC to find the terminal value (TV), then discounting the TV at the IRR to find its PV.   b.  The higher the WACC used to calculate the NPV, the lower the calculated NPV will be.   c.  If a project's NPV is greater than zero, then its IRR must be less than the WACC.   d.  If a project's NPV is greater than zero, then its IRR must be less than zero.   e.  The NPVs of relatively risky projects should be found using relatively low WACCs. Provide explanation for choice

Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.   a. A project's NPV is found by compounding the cash inflows at the IRR to find the terminal value (TV), then discounting the TV at the WACC.     b. The NPV of a relatively low-risk project should be found using a relatively high WACC.     c. If a project's NPV is less than zero, then its IRR must be less than the WACC.     d. The lower the WACC used to calculate it, the lower the calculated NPV will be.     e. If a project's NPV is greater than zero, then its IRR must be less than zero.

Use the information provided to answer the questions Calculate the Accounting Rate of Return (on average investment) of Project B (expressed to twodecimal places).Calculate the Net Present Value of each project (with amounts rounded off to the nearest Rand). Use your answers from previous question to recommend the project that should be chosen. Motivateyour choice.

Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 11 percent, and that the maximum allowable payback and discounted payback statistic for the project are 2 and 3 years, respectively.   Time  0 1 2 3 4 5 6   Cash Flow -1,040 140 460 660 660 260 660 Use the NPV decision rule to evaluate this project; should it be accepted or rejected?

To calculate net present value of a project with normal cash flows, find the present value of the expected cash flows, and subtract A)  retained earnings.   B)  the cost of the investment.   C)  the factor loading.   D)  the payback period.

A company considering a project with extremely risky cash flows decides to apply a premium to the discount rate used to evaluate the project. The management of the company has set the following limits regarding the use of premia on discount rates: If the CV of the project is less than 1, no premium is added. If the CV of the project is 1 or more, but less than 1.5, the discount rate is multiplied by 1.5 If the CV of the project is 1.5 or more, the discount rate is multiplied by 2. The project under consideration has a CV of 1.5 while the company’s WACC is 10%. What would the discount rate employed to evaluate the project be?