Principles of Corporate Finance
13th Edition
ISBN: 9781260465099
Author: BREALEY, Richard
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Textbook Question
Chapter 5, Problem 11PS
The
- a. Explain to Mr. Clops why this is not the correct procedure.
- b. Show him how to adapt the IRR rule to choose the best project.
- c. Show him that this project also has the higher
NPV .
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Finance Question
Mr. Cyrus Clops, the president of Giant Enterprises, has to make a choice between two possible investments:
Cash Flows ($thousands)
Project
C0
C1
C2
IRR(%)
A
-400
+250
+300
23
B
-200
+140
+179
36
The opportunity cost of capital is 5%.
Mr. Clops is tempted to take B, which has the higher IRR.
Why should not Mr. Clops base his decision on the IRR?
Multiple Choice
When projects have different sizes (very different cash flows in year 0), the IRR may give the wrong solution.In this case project B has a higher IRR than project A. However, project B is half the size of project A.
The NPV gives the right choice. In this case the NPV of Project A is $150 > $50 the NPV of Project B
When projects have different sizes (very different cash flows in year 0), the IRR may give the wrong solution.In this case project B has a higher IRR than project A. However, project B is half the size of project A.
The NPV gives the right choice. In…
a. Cobre Company is considering the purchase of new equipment that will speed up the process for extracting copper.
The equipment will cost $3,800,000 and have a life of 5 years with no expected salvage value. The expected cash
flows associated with the project are as follows:
Year
Cash Revenues
Cash Expenses
$6,000,000
$4,800,000
6,000,000
4,800,000
3
6,000,000
4,800,000
4
6,000,000
4,800,000
6,000,000
4,800,000
b. Emily Hansen is considering investing in one of the following two projects. Either project will require an investment o
$75,000. The expected cash revenues minus cash expenses for the two projects follow. Assume each project is
depreciable.
Year
Project A
Project B
1.
$2,500
$22,500
2
30,000
30,000
45,000
45,000
4
75,000
22,500
75,000
22,500
c. Suppose that a project has an ARR of 30% (based on initial investment) and that the average net income of the
project is $220,000.
d. Suppose that a project has an ARR of 50% and that the investment is $250,000.
3.
Chapter 5 Solutions
Principles of Corporate Finance
Ch. 5 - (IRR) Check the IRRs for project F in Section 5-3.Ch. 5 - (IRR) What is the IRR of a project with the...Ch. 5 - (XIRR) What is the IRR of a project with the...Ch. 5 - Payback a. What is the payback period on each of...Ch. 5 - Payback Consider the following projects: a. If the...Ch. 5 - Prob. 3PSCh. 5 - IRR Write down the equation defining a projects...Ch. 5 - Prob. 5PSCh. 5 - IRR Calculate the IRR (or IRRs) for the following...Ch. 5 - IRR rule You have the chance to participate in a...
Ch. 5 - IRR rule Consider a project with the following...Ch. 5 - IRR rule Consider projects Alpha and Beta: The...Ch. 5 - IRR rule Consider the following two mutually...Ch. 5 - IRR rule Mr. Cyrus Clops, the president of Giant...Ch. 5 - Prob. 12PSCh. 5 - Investment criteria Consider the following two...Ch. 5 - Profitability index Look again at projects D and E...Ch. 5 - Capital rationing Suppose you have the following...Ch. 5 - Prob. 17PSCh. 5 - Prob. 18PS
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