Loose-leaf Fundamentals of Corporate Finance with Connect Access Card
11th Edition
ISBN: 9781259407727
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Chapter 22, Problem 10CRCT
Summary Introduction
To determine: How a person’s decision might be accepted or rejected to the proposal that could have been affected by frame dependence.
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Reconsider Example 11.6, where the expected cash flows for the Capstone project arePeriod 0 1 2 3 4 5Cash Flow -$55,000 $17,094 $20,439 $20,069 $20,212 $29,660Suppose that Capstone consider the MicroCHP project to be just one of their normal risky projects. Then the appropriate discount rate to use is 15%. However, Capstone considers the MicroCHP project to be much riskier than normal projects, so it believes an additional risk premium of 6.93% should be added. If management has decided to use a risk-adjusted discount rate of 21.93% to compensate for the uncertainty of the cash flows, is this project acceptable?
Q15. Which of the following is NOT potentially problematic for Internal Rate of Return (IRR)?
Group of answer choices
1. IRR cannot cope with multiple future cash flows
2. It is assumed that intermediate cash flow can be reinvested at the same rate as the project IRR
3. IRR may produce nonsense answers when there is unconventional cash flow with more than one change of sign'.
4. When comparing 2 projects with very different sensitivity to the assumed discount rate, IRR may conflict with Net Present Value
28...Some of the weaknesses of the Discounted Payback Period method of Capital Budgeting Analysis are (select all that apply):
a.Ignores the time value of money (TVM).
b.Ignores CFs occuring after the payback period.
c.There is no relationship between a given payback and investor wealth maximization.
d.It is easy to calculate and understand.
Chapter 22 Solutions
Loose-leaf Fundamentals of Corporate Finance with Connect Access Card
Ch. 22.2 - Prob. 22.2ACQCh. 22.2 - Prob. 22.2BCQCh. 22.2 - Prob. 22.2CCQCh. 22.3 - What is frame dependence? How is it likely to be...Ch. 22.3 - Prob. 22.3BCQCh. 22.4 - What is the affect heuristic? How is it likely to...Ch. 22.4 - Prob. 22.4BCQCh. 22.4 - Prob. 22.4CCQCh. 22.5 - Prob. 22.5ACQCh. 22.5 - Prob. 22.5BCQ
Ch. 22.6 - Prob. 22.6ACQCh. 22.6 - Prob. 22.6BCQCh. 22 - Cognitive errors are best explained as errors in...Ch. 22 - Prob. 22.2CTFCh. 22 - Prob. 22.5CTFCh. 22 - Prob. 1CRCTCh. 22 - Prob. 2CRCTCh. 22 - Frame Dependence [LO2] How can frame dependence...Ch. 22 - Prob. 4CRCTCh. 22 - Probabilities [LO3] Suppose you are flipping a...Ch. 22 - Prob. 6CRCTCh. 22 - Prob. 7CRCTCh. 22 - Prob. 8CRCTCh. 22 - Prob. 9CRCTCh. 22 - Prob. 10CRCTCh. 22 - Your 401 (k) Account at SS Air You have been at...Ch. 22 - Your 401 (k) Account at SS Air You have been at...Ch. 22 - Prob. 3M
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- 27...NPV is the best tool to use for capital budgeting because: a.It uses the IRR to discount cash flows as opposed to using the WACC. The IRR is a more appropriate discount rate. b.It provides a direct measure of the value that the project adds to shareholder wealth and properly considers the Time Value of Money. c.It can not handle non-normal cashflow streams. d.NPV isn't the best tool to use for capital budgeting.arrow_forwardMf2. Your firm is considering choosing either Project X or Project Y with the following cash flows: Year: 0. 1 2 3 4 Project X -$150,000 $75,000. $65,000 55,000 $45,000 Project Y -$180,000 $90,000. $70,000 $70,000 $50,000 Between a discount rate of ______ and ______ you can be sure your firm should prefer Project Y to Project X. a. 0%; 14.16% b. 0%; 10.25% c.14.16%; 24.26% d10.25; 22.63% e. 0%; 25%arrow_forward1. In the context of capital budgeting, what is an opportunity cost?2. Given the choice, would a firm prefer to use MACRS depreciation or straight-line depreciation? Why?3. In our capital budgeting examples, we assumed that a firm would recover all of the working capital it invested in a project. Is this a reasonable assumption? When might it not be valid?4. Suppose a financial manager is quoted as saying, “Our firm uses the stand-alone principle. Because we treat projects like minifirms in our evaluation process, we include financing costs because they are relevant at the firm level.” Critically evaluate this statement.arrow_forward
- Mo5. can you please help me answer the question below, thank you In an NPV calculation, if the net present value of the future cash flows from an investment are less than the invested capital, it is an investment the firm should not make.arrow_forward16. The company cost of capital may be an inappropriate discount rate for a capital budgeting proposal if: A) it calculates a negative NPV for the proposal. B) the proposal has a different degree of risk. C) the company has unique risk. D) the company expects to earn more than the risk-free rate.arrow_forwardQuestion7 In discounted cash flow analysis, which of the following is a bad decision rule for a normal investment project? A If internal rate of return (IRR) is greater than the cost of capital then reject B If IRR is less than cost of capital then reject C If net present value (NPV) is greater than 0 then accept D If NPV is negative then rejectarrow_forward
- 11. Which one of the following statements is most CORRECT? a. Real options change the risk, but not the size, of projects' expected NPVs. b. Very few projects have real options. They are theoretically interesting but of little practical importance. c. Real options are more valuable when there is very little uncertainty about the true values of future sales and costs. d. Real options change the size, but not the risk, of projects' expected NPVs. e. Real options can reduce the cost of capital that should be used to discount a project's expected cash flows.arrow_forwardHi, please complete the left question sent earlier. Here is the remaining part of the question. 4. If the opportunity cost of capital is 10%, which projects have positive NPVs? How do you know? 5. “If a firm uses a single cutoff period for all projects, it is likely to accept too many short-lived projects.” Is this statement true or false? How do you know? 6. If the firm uses the discounted-payback rule, will it accept any negative NPV projects? Will it turn down any positive NPV projects? How do you know?arrow_forward16) Which of the following is the significance of Capital Budgeting? a. Irreversible b. All the options c. Long term effect d. Growtharrow_forward
- 47) Modern Refurbishing Inc. is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's IRR can be less than the cost of capital (and even negative), in which case it will be rejected. Year 0 1 2 3 4 Cash flows −$850 $300 $290 $280 $270 a. 15.89% b. 13.13% c. 19.22% d. 17.48% e. 14.44% 48) Modern Refurbishing Inc. is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's IRR can be less than the cost of capital (and even negative), in which case it will be rejected. Year 0 1 2 3 4 Cash flows −$850 $300 $290 $280 $270 a. 15.89% b. 13.13% c. 19.22% d. 17.48% e. 14.44%arrow_forwardBasic NPV methods tell us that the value of a project today is NPV0. Time value of money issues also lead us to believe that if we choose not to do the project that it will be worth NPV1 one period from now, such that NPV0 > NPV1. Why then do we see some firms choosing to defer taking on a project?arrow_forward
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