Principles of Corporate Finance
13th Edition
ISBN: 9781260465099
Author: BREALEY, Richard
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Chapter 6, Problem 30PS
Mutually exclusive investments and project lives Machines A and B are mutually exclusive and are expected to produce the following real cash flows:
The real
- a. Calculate the
NPV of each machine. - b. Calculate the equivalent annual cash flow from each machine.
- c. Which machine should you buy?
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Students have asked these similar questions
You must analyze two projects, X and Y. Each project costs$10,000, and the firm’s WACC is 12%. The expected cash flows are as follows:a. Calculate each project’s NPV, IRR, MIRR, payback, and discounted payback.b. Which project(s) should be accepted if they are independent?c. Which project(s) should be accepted if they are mutually exclusive?d. How might a change in the WACC produce a conflict between the NPV and IRR rankingsof the two projects? Would there be a conflict if WACC were 5%? (Hint: Plot theNPV profiles. The crossover rate is 6.21875%.)e. Why does the conflict exist?
Consider the cash flows for the following investment projects:
(a) For Project A. find the value of X that makes the equivalent annual receiptsequal the equivalent annual disbursement at i = 13%.(b) Would you accept Project Bat i = 15% based on the AE criterion?
Consider the cash flows for the investment projects given in Table. Assume that the
MARR = 10%.
(a) Suppose A, B, and C are mutually exclusive projects. Which project would be selected
on the basis of the IRR criterion?
(b) Assume that projects C and E are mutually exclusive. Using the IRR criterion, which
Project would you select?.
Net Cash Flow
B
D.
E
-4,850
2,100
2,100
2,500
4,250
3,200
2,850
800
300
4,250
4,250
2,850
2,900
1,050
500
-835
-835
-835
-835
1,500
3.250
1,600
1,200
2,100
2,100
Chapter 6 Solutions
Principles of Corporate Finance
Ch. 6 - Cash flows Which of the following should be...Ch. 6 - Cash flows Reliable Electric, a major Ruritanian...Ch. 6 - Prob. 3PSCh. 6 - Prob. 4PSCh. 6 - Real and nominal flows Mr. Art Deco will be paid...Ch. 6 - Real and nominal flows Restate the net cash flows...Ch. 6 - Real and nominal flows Guandong Machinery is...Ch. 6 - Working capital Each of the following statements...Ch. 6 - Prob. 9PSCh. 6 - Project NPV Better Mousetraps research...
Ch. 6 - Project NPV A widget manufacturer currently...Ch. 6 - Project NPV Marsha Jones has bought a used...Ch. 6 - Project NPV United Pigpen is considering a...Ch. 6 - Project NPV Imperial Motors is considering...Ch. 6 - Project NPV and IRR A project requires an initial...Ch. 6 - Taxes and project NPV In the International Mulch...Ch. 6 - Depreciation and project NPV Suppose that Sudbury...Ch. 6 - Depreciation and project NPV Ms. T. Potts, the...Ch. 6 - Prob. 20PSCh. 6 - Prob. 21PSCh. 6 - Prob. 22PSCh. 6 - Equivalent annual cash flow Look at Problem 22...Ch. 6 - Equivalent annual cash flow Deutsche Transport can...Ch. 6 - Prob. 25PSCh. 6 - Mutually exclusive investments and project lives...Ch. 6 - Mutually exclusive investments and project lives...Ch. 6 - Mutually exclusive investments and project lives....Ch. 6 - Mutually exclusive investments and project lives...Ch. 6 - Mutually exclusive investments and project lives...Ch. 6 - Replacement decisions Machine C was purchased five...Ch. 6 - Replacement decisions Hayden Inc. has a number of...Ch. 6 - Replacement decisions. You are operating an old...Ch. 6 - Replacement decisions. A forklift will last for...Ch. 6 - The cost of excess capacity The presidents...Ch. 6 - Effective tax rates One measure of the effective...Ch. 6 - Equivalent annual costs We warned that equivalent...
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- IRR: Mutually exclusive projects Nile Inc. wants to choose the better of two mutually exclusive projects that expand warehouse capacity. The projects' cash flows are shown in the following table: . The cost of capital is 18%. a. The internal rate of return (IRR) of project X is %. (Round to two decimal places.) Data table Is project X acceptable on the basis of IRR? (Select the best answer below.) (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) Yes O No Project X $500,000 Project Y $310,000 The internal rate of return (IRR) of project Y is %. (Round to two decimal places.) Initial investment (CF) Is project Y acceptable on the basis of IRR? (Select the best answer below.) Year (t) Cash inflows (CF,) $120,000 $140,000 $105,000 $60,000 1 $100,000 O Yes $160,000 O No $170,000 $190,000 b. Which project is preferred? (Select the best answer below.) $250,000 $30,000 OA. Project X N 34 5arrow_forwarda. They payback period of project A is ___ years (round to two decimal places) The payback period of project B is ____ years. (round to two decimal places) According to the payback method, which project should the firm choose? b. The NPV of project A is $___ The NPV of project B is $___ c. The IRR of project A is ___ The IRR of project B is ___ d. Make a reccomendationarrow_forwardAll techniques: Decision among mutually exclusive investments Pound Industries is attempting to select the best of three mutually exclusive projects. The initial investment and subsequent cash inflows associated with these projects are shown in the following table. Cash flows Initial investment (CF) Cash inflows (CF), t= 1 to 5 OA. Project A a. Calculate the payback period for each project. b. Calculate the net present value (NPV) of each project, assuming that the firm has a cost of capital equal to 11%. c. Calculate the internal rate of return (IRR) for each project. d. Indicate which project you would recommend. a. The payback period of project A is The payback period of project B is The payback period of project C is b. The NPV of project A is $ The NPV of project B is $ (Round to the nearest cent.) The NPV of project C is $. (Round to the nearest cent.) c. The IRR of project A is%. (Round to two decimal places.) The IRR of project B is %. (Round to two decimal places.) The IRR of…arrow_forward
- Consider the cash flows for the investment projects given in Table. Assume that the MARR = 10%. (a) Suppose A, B, and C are mutually exclusive projects. Which project would be selected on the basis of the IRR criterion (b) Assume that projects C and È are mutually exclusive. Using the IRR criterion, which Project would you select? Net Cash Flow A В C D E -4,250 3,200 2,850 -4,250 1,500 3,250 1,600 1,200 -4,250 2,850 -4,850 2,100 2,100 2,100 2,100 2,500 1 -835 2,900 1,050 500 2 -835 3 800 -835 4 300 -835arrow_forwardConsider the following two projects: Cash flows Project A Project B C0�0 −$ 240 −$ 240 C1�1 100 123 C2�2 100 123 C3�3 100 123 C4�4 100 a. If the opportunity cost of capital is 8%, which of these two projects would you accept (A, B, or both)? b. Suppose that you can choose only one of these two projects. Which would you choose? The discount rate is still 8%. c. Which one would you choose if the cost of capital is 16%? d. What is the payback period of each project? e. Is the project with the shortest payback period also the one with the highest NPV? f. What are the internal rates of return on the two projects? g. Does the IRR rule in this case give the same answer as NPV? h. If the opportunity cost of capital is 8%, what is the profitability index for each project? i. Is the project with the highest profitability index also the one with the highest NPV? j. Which measure should you use to choose between the projects?arrow_forwardConsider two mutually exclusive projects with the following expected cash flows : Cash Flows Year Project C Project D 0 -15,000 -21,000 1 6,000 6,000 2 12,000 16,000 3 8,000 14,000 Whichever project you choose, if any, you require a return of 12% on your investment. a. If you apply the discounted payback criterion, which project will you choose? Why? b. If you apply the NPV criterion, which project will you choose? Why? c. Based on your answers in (a) and (b), which project will you finally choose? Why ? (i.e clearly explain the strengths and the weaknesses of each method therefore the reason(s) for choosing the project based on the chosen method)arrow_forward
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