Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 19, Problem 26PS
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To discuss: The changes in the valuation of Company R.
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USE PRESENT WORTH AND CO-TERMINATED ANALYSIS. Show cashflow diagram and complete solution. Consider the three small mutually exclusive investment alternatives in the tablebelow. The feasible alternative chosen must provide service for a 10-year period.The MARR is 12% per year, and the market value of each is 0 at the end of usefullife. Which alternative should be chosen? Use the imputed market valuetechnique in alternative C, epsilon = 10%
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QUESTION 37
To estimate the future value of a resource, the World Bank and most businesses use _____.
a.
a 10% annual discount rate
b.
a 20% annual decrease
c.
a 20% annual gain in value
d.
a 10% annual increase
e.
complicated calculations based upon the specific resource
Chapter 19 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 19.A - The U.S. government has settled a dispute with...Ch. 19.A - Prob. 2QCh. 19 - Prob. 1PSCh. 19 - Prob. 2PSCh. 19 - WACC True or false? Use of the WACC formula...Ch. 19 - Flow-to-equity valuation What is meant by the...Ch. 19 - APV True or false? The APV method a. Starts with a...Ch. 19 - APV A project costs 1 million and has a base-case...Ch. 19 - Prob. 7PSCh. 19 - APV Consider a project lasting one year only. The...
Ch. 19 - WACC The WACC formula seems to imply that debt is...Ch. 19 - Prob. 10PSCh. 19 - Prob. 11PSCh. 19 - WACC Table 19.4 shows a simplified balance sheet...Ch. 19 - WACC How will Rensselaer Felts WACC and cost of...Ch. 19 - APV Digital Organics (DO) has the opportunity to...Ch. 19 - APV Consider another perpetual project like the...Ch. 19 - Prob. 18PSCh. 19 - Prob. 19PSCh. 19 - Prob. 22PSCh. 19 - Company valuation Chiara Companys management has...Ch. 19 - Prob. 25PSCh. 19 - Prob. 26PS
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- Identify the one true statement. a. Compare investment alternatives over a common planning horizon. b. Investment alternatives with unequal planning horizons cannot be compared. c. When the useful lives are not equal, use 10 years as the common time period. d. When the useful lives are not equal, use infinity as the common time period.arrow_forwardSolving for Unknown Variables for Different Investments Solve for the unknown variables in each of the four separate investment scenarios. Assume interest is compounded annually in each case. Round final answer to the nearest whole number or percentage point. Use a negative sign only for an amount related to PV. Investment 1 Investment 2 Investment 3 Investment 4 RATE Answer 7% 4% 6% NPER 4 Answer 12 10 PV $(14,500) $(63,800) Answer $(237,800) FV $23,200 $101,500 $52,200 Answerarrow_forwardQuestion 18 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 Required:Calculate the sensitivity of the investment decision to a change in the annual contribution.arrow_forward
- 17. Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B)0 −$291,000 −$41,6001 37,000 20,0002 55,000 17,6003 55,000 17,2004 366,000 14,000 a) What is the Internal Rate of Return (IRR) for each of these projects? b) Using the IRR decision rule, which project should the company accept? c) If the required return is 11 percent, what is the Net Present Value (NV) for each of these projects? d) Using the NPV decision rule, which project should the company accept? e) Why do you think the NPV and IRR rules do not agree on same project approval/rejection direction?arrow_forward6.Calculate the project's Modified Internal Rate of Return (MIRR). What critical assumption does the MIRR make that differentiates it from the IRR? TIP : look for the definition of Modified Internal Rate of Return, and then do it in excel, easy !!! Year Net Cash flow Future Value of Net Cash flow 0 -$20.8 example 1 $4.5 $7.97 (n=6, i=10%)=fv(.1,6,,4.5) 2 $6.3 (n=5, i=10%) 3 $5.2 (n=4, i=10%) 4 $3.9 (n=3, i=10%) 5 $2.1 (n=2, i=10%) 6 $1.3 (n=1, i=10%) 7 $0.5 (n=0, i=10%) Sum = $XX.XX MIRR = ( in excel ) Rate ( 7,-20.8, xx.xx) 7.Where does the value of MIRR fall relative to the discount rate and IRR?arrow_forwardQuestion 10 An investment has an initial cost of $410,000 and will generate the net income amounts shown below. This investment will be depreciated straight line to zero over the 4-year life of the project. Should this project be accepted based on the average accounting rate of return if the required rate is 16 percent? Why or why not? Year Net Income 1 $21,000 2 24,800 3 37,500 4 45,000 Group of answer choices Yes; because the AAR is greater than 16 percent No; because the AAR is less than 16 percent Yes; because the AAR is less than 16 percent Yes; because the AAR is equal to 16 percent No; because the AAR is greater than 16 percentarrow_forward
- Consider the following project: Period 0 1 2 3 Net cash flow −205 0 89.55 238.89 The internal rate of return is 19%. The NPV, assuming a 19% opportunity cost of capital, is exactly zero. Calculate the expected economic income and economic depreciation in each year. (Negative answers should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.)arrow_forward14. The Arabian Oil Company is considering an investment that can be undertaken this year or postponed one year. The investment cash flows if the investment is undertaken now would be as follows: period 0, −$100; period 1, $200. The cash flows if it is delayed one period would be as follows: period 1, −$100; period 2, $200. Assume a time value of money of 0.05. Should the company invest now or delay one year? First use the internal rate of return method and then use the net present value method.arrow_forwardC1 = 68100C2 =91200R = 45100 A ) Select the best project using Return on Investment ROI ( Rate of Return ) method the data of both projects are shown the table below. B ) Compare the effect of decrease in revenues of Annual revenues of 5 % on the rate of return for project Y ( calculate the % of change in ROI ).arrow_forward
- What is the investment cost of Alternative 2 that will cause it to breakeven with Alternative 1, assuming the MARR = 12% per year. Further assume cotermination at the end of year five. State any other assumptions you make.arrow_forwardQuestion 2 (Investment Decision Rules and Project Cash Flows) Consider a hypothetical economy that has NO tax. ABC Ltd. is considering investing in a 2-year project which is expected to generate the following year-end cash flows: C1 = $110 million, C2 = $115 million. The yearly discount rate for the project is 10%. The initial cost of the project is $200 million. (a) Compute the profit and NPV of the project. (b) Based on the answer of part (a), should the project be accepted? Explain. (c) ABC’s cut-off period is 2 years. Compute the PI and Payback of the project. Based on these two methods, should ABC accept the project? (d) Write down the numerical formula for computing the IRR of this project. What is the minimum IRR value that would make this project acceptable? Explain. (e) Given the recommendations based on the four decision rules above, which project should ABC Ltd. accept? (f) Now suppose that of the $200m initial expenditure, $50m was used for the…arrow_forwardQuestion#03 MG Automobiles has an adjusted WACC of 10.08%. The company has a capital structure consisting of 70% equity and 30% debt, a cost of equity of 12.00%, a before-tax cost of debt of 8.00%, and a tax rate of 30%. MG is considering expanding by building a new assembling plant in a distant city and considers the project to be riskier than his current operation. He estimates his existing beta to be 1.0, the required return on the market portfolio to be 12.00%, the risk-free rate to be 3.00%, and the beta for the new project to be 1.40. Given this information, and assuming the cost of debt will not change if MG undertakes the new project, calculate adjusted WACC that he should use in his decision-making?arrow_forward
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