CORPORATE FINANCE--CONNECT ACCESS CARD
12th Edition
ISBN: 9781264331062
Author: Ross
Publisher: MCG CUSTOM
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Textbook Question
Chapter 5, Problem 11QAP
As a financial analyst for BRC, you are asked the following questions:
a. If your decision rule is to accept the project with the greater IRR, which project should you choose?
b. Because you are fully aware of the IRR rule’s scale problem, you calculate the incremental IRR for the cash flows. Based on your computation, which project should you choose?
c. To be prudent, you compute the NPV for both projects. Which project should you choose? Is it consistent with the incremental IRR rule?
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Students have asked these similar questions
Consider the following two mutually exclusive projects:
Year
Cash Flow (A)
Cash Flow (B)
0
-$ 54,000
-$ 23,000
1
12,700
11,600
2
23,200
11,200
3
27,600
4
46,500
12,500
6,000
Whichever project you choose, if any, you require a rate of return of 14 percent on your Investment. If you apply the payback criterion, you will choose Project
NPV criterion, you will choose Project
If you apply the IRR criterion, you will choose Project
If you choose the profitability Index criterion, you will choose Project
Based on your first four answers, which project will you finally choose?
If you apply the
Consider the following two mutually exclusive projects:
Year Cash Flow (A) Cash Flow (B)
0 −$29,000 −$29000
1 14,400 4,300
2 12,300 9,800
3 9,200 15,200
4 5,100 16,800
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?
Calculate the payback period, net present value, and internal rate of return for Project A. Assume a discount rate of 10%. Should the firm accept or reject Project A? Explain. If Project A and Project B are mutually exclusive, which is the better choice? Explain. What are “non-conventional” cash flows? What issues arise when evaluating projects with “non-conventional” cash flows?
Project A
Project B
Year
Cash Flow
Year
Cash Flow
0
-$100,000
0
-$1
1
$70,000
1
$0
2
$0
2
$0
3
$50,000
3
$10
Chapter 5 Solutions
CORPORATE FINANCE--CONNECT ACCESS CARD
Ch. 5 - Payback Period and Net Present Value If a project...Ch. 5 - Net Present Value Suppose a project has...Ch. 5 - Comparing Investment Criteria Define each of the...Ch. 5 - Payback and Internal Rate of Return A project has...Ch. 5 - Prob. 5CQCh. 5 - Capital Budgeting Problems What are some of the...Ch. 5 - Prob. 7CQCh. 5 - Prob. 8CQCh. 5 - Net Present Value versus Profitability Index...Ch. 5 - Internal Rate of Return Projects A and B have the...
Ch. 5 - Net Present Value You are evaluating Project A and...Ch. 5 - Modified Internal Rate of Return One of the less...Ch. 5 - Net Present Value It is sometimes stated that the...Ch. 5 - Prob. 14CQCh. 5 - Prob. 1QAPCh. 5 - Prob. 2QAPCh. 5 - Prob. 3QAPCh. 5 - Prob. 4QAPCh. 5 - Prob. 5QAPCh. 5 - Prob. 6QAPCh. 5 - Prob. 7QAPCh. 5 - Prob. 8QAPCh. 5 - Prob. 9QAPCh. 5 - Prob. 10QAPCh. 5 - NPV versus IRR Consider the following cash flows...Ch. 5 - Prob. 12QAPCh. 5 - Prob. 13QAPCh. 5 - Prob. 14QAPCh. 5 - Prob. 15QAPCh. 5 - Comparing Investment Criteria Consider the...Ch. 5 - Prob. 17QAPCh. 5 - Comparing Investment Criteria Consider the...Ch. 5 - Prob. 19QAPCh. 5 - Prob. 20QAPCh. 5 - MIRR Suppose the company in the previous problem...Ch. 5 - Prob. 22QAPCh. 5 - Prob. 23QAPCh. 5 - Prob. 24QAPCh. 5 - Prob. 25QAPCh. 5 - Prob. 26QAPCh. 5 - Prob. 27QAPCh. 5 - Prob. 28QAPCh. 5 - Prob. 29QAPCh. 5 - Prob. 30QAPCh. 5 - Construct a spreadsheet to calculate the payback...Ch. 5 - Based on your analysis, should the company open...Ch. 5 - Prob. 3MC
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