CORP FINANCE (LL) >C< W/CONN
CORP FINANCE (LL) >C< W/CONN
12th Edition
ISBN: 9781264873760
Author: Ross
Publisher: MCG CUSTOM
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Chapter 6, Problem 19QAP
Summary Introduction

To calculate: NPV to select the better investment opportunity.

Introduction: The term Net present value refers to the method of making a capital budgeting decision where it represents the present value of benefits that can be compared with the initial investment so that the investment decision of the project can be evaluated.

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The net present value of a capital budgeting project is ________.     The difference between the present value of the expected future cash flows and the initial cash outflow     The present value of the expected future cash flows divided by the initial cash outflow     The initial cash outflow divided by the present value of the expected future cash flows
A project's internal rate of return (IRR) is the discount rate YTM on a bond. The equation for calculating the IRR is: timing Project A Project B 0 1 2 CFt is the expected cash flow in Period t and cash outflows are treated as negative cash flows. There must be a change in cash flow signs to calculate the IRR. The IRR equation is simply the NPV equation solved for the particular discount rate that causes NPV to equal zero 320 255 The IRR calculation assumes that cash flows are reinvested at the IRR If the IRR is greater ✔than the project's risk-adjusted cost of capital, then the project should be accepted; however, if the IRR is less than the project's risk-adjusted cost of capital, then the project should be rejected ✓✓✓. Because of the IRR reinvestment rate assumption, when mutually exclusive projects are evaluated the IRR approach can lead to conflicting results from the NPV method. Two basic conditions can lead to conflicts between NPV and IRR: ✔ differences (earlier cash flows in…
Discuss the four alternative methods for evaluating capital budgeting projects? What is an advantage and disadvantage of each method? Furthermore, the accrual accounting rate of return (AARR) divides an accrual accounting measure of average annual income from a project by an accrual accounting measure of its investment.  What are the strengths and weaknesses of the accrual accounting rate-of-return (AARR) method for evaluating long-term projects?

Chapter 6 Solutions

CORP FINANCE (LL) >C< W/CONN

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