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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Textbook Question
Chapter 5, Problem 5PS
IRR rule* Consider a project with the following cash flows:
- a. How many internal rates of return does this project have?
- b. Which of the following numbers is the project IRR: (i) −50%; (ii) −12%; (iii) +5%; (iv) +50%?
- c. The
opportunity cost of capital is 20%. Is this an attractive project? Briefly explain.
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2. Investment Criteria. Consider the following information.
Expected Net Cash Flows
YearProject X
0($10,000)
16,500
23,500
33,000
41,000
Assume the discount rate is 10 percent.
a. Calculate Project X’s discounted payback period. Should the project be accepted?
b. Calculate the profitability index. Should the project be accepted?
c. Calculate the accounting rate of return. Should the project be accepted?
A firm evaluates all of its projects by using the NPV decision rule. Year Cash Flow 0 −$ 28,000 1 24,000 2 13,000 3 6,000 a. At a required return of 28 percent, what is the NPV for this project? b. At a required return of 35 percent, what is the NPV for this project?
A firm evaluates all of its projects by applying the IRR rule. A project under consideration has the following cash flows:
Year
Cash Flow
0
–$
28,400
1
12,400
2
15,400
3
11,400
If the required return is 15 percent, what is the IRR for this project?
Should the firm accept the project?
Chapter 5 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
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 - IRR Write down the equation defining a projects...Ch. 5 - Prob. 3PSCh. 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 - Capital rationing Suppose you have the following...
Ch. 5 - Payback Consider the following projects: a. If the...Ch. 5 - Prob. 9PSCh. 5 - IRR Calculate the IRR (or IRRs) for the following...Ch. 5 - IRR rule Consider the following two mutually...Ch. 5 - IRR rule Mr. Cyrus Clops, the president of Giant...Ch. 5 - Prob. 13PSCh. 5 - Profitability index Look again at projects D and E...Ch. 5 - Prob. 15PSCh. 5 - Prob. 16PS
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- Comparing Investment Criteria [L01,2,3,5,7] Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 -$300,000 -$40,000 1 20,000 19,000 2 50,000 12,000 3 50,000 18,000 4 390,000 10,500 Whichever project you choose, if any, you require a 15 per cent return on your investment. a. If you apply the payback criterion, which will you choose? Why? b. If you apply the discounted payback criterion, which investment will you choose? Why? c. If you apply the NPV criterion, which investment will you choose? Why? d. If you apply the IRR criterion, which investment will you choose? Why? e. If you apply the profitability index criterion, which investment will you choose? Why? f. Based on your answers in (a) through (e), which project will you finally choose? Why? Please explain your calculations and conclusionsarrow_forwardThe cash flows associated with an investment project are as follows: Year Project Y 0 (40 000) 1 10000 2 10000 3 15000 4 20000 The required return is 5 percent. Reinvestment rate 6%. What’s the discount payback period of the projects? (compile a spreadsheet) Calculate NPV, PI, IRR , MIRR of a projects Should the firm accept the project?arrow_forwardConsider 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?arrow_forward
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