CORPORATE FINANCE(LL)
11th Edition
ISBN: 9781260430011
Author: Ross
Publisher: MCG
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Question
Chapter 6, Problem 5QP
Summary Introduction
To identify: The year 1, year 2, and year 3 net cash flow and the NPV of the project.
NPV is the technique of capital budgeting. To select the project or not to select the project depends on the NPV of the project. If the project has positive NPV than accept the project, if the NPV has negative then reject the project.
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Students have asked these similar questions
What is the net present value of a project with the following cash flows and a required return of 12%?
Year
Cash Flow
0
-$ 28,900
1
$ 12,450
2
$ 19,630
3
$ 2,750
The Correct Answer is
-$177.62, but how to calculate to arrive at that number.
Use the following information for problems 1 to 5. Assume that the projects are mutually exclusive.
Year
Cash Flow (A)
Cash Flow (B)
0
($525,600)
($425,600)
1
$323,100
$235,900
2
$180,200
$163,900
3
$145,000
$135,000
4
$88,220
$79,000
What is the IRR for each of these projects? Using the IRR decision rule, which project should the company accept? Is this decision necessarily correct?
If the required return is 13 percent, what is the NPV for each of these projects? Which project will the company choose if it applies the NPV decision rule?
Over what range of discount rates would the company choose Project A? Project B? At what discount rate would the company be indifferent between these two projects? Explain.
Compute the payback period for each project.
Compute the profitability index for each project.
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 6 Solutions
CORPORATE FINANCE(LL)
Ch. 6 - Opportunity Cost In the context of capital...Ch. 6 - Prob. 2CQCh. 6 - Incremental Cash Flows Your company currently...Ch. 6 - Depreciation Given the choice, would a firm prefer...Ch. 6 - Prob. 5CQCh. 6 - Prob. 6CQCh. 6 - Equivalent Annual Cost When is EAC analysis...Ch. 6 - Prob. 8CQCh. 6 - Capital Budgeting Considerations A major college...Ch. 6 - To answer the next three questions, refer to the...
Ch. 6 - Prob. 11CQCh. 6 - To answer the next three questions, refer to the...Ch. 6 - Calculating Project NPV Flatte Restaurant is...Ch. 6 - Calculating Project NPV The Best Manufacturing...Ch. 6 - Calculating Project NPV Down Under Boomerang,...Ch. 6 - Calculating Project Cash Flow from Assets In the...Ch. 6 - Prob. 5QPCh. 6 - Project Evaluation Your firm is contemplating the...Ch. 6 - Project Evaluation Dog Up! Franks is looking at a...Ch. 6 - Prob. 8QPCh. 6 - Calculating NPV Howell Petroleum is considering a...Ch. 6 - Calculating EAC You are evaluating two different...Ch. 6 - Cost-Cutting Proposals Massey Machine Shop is...Ch. 6 - Prob. 12QPCh. 6 - Prob. 13QPCh. 6 - Comparing Mutually Exclusive Projects Vandalay...Ch. 6 - Capital Budgeting with Inflation Consider the...Ch. 6 - Prob. 16QPCh. 6 - Prob. 17QPCh. 6 - Cash flow Valuation Phillips Industries runs a...Ch. 6 - Equivalent Annual Cost Bridgton Golf Academy is...Ch. 6 - Prob. 20QPCh. 6 - Prob. 21QPCh. 6 - Prob. 22QPCh. 6 - Calculating Project NPV With the growing...Ch. 6 - Calculating Project NPV You have been hired as a...Ch. 6 - Calculating Project NPV Pilot Plus Pens is...Ch. 6 - EAC and Inflation Office Automation, Inc., must...Ch. 6 - Project Analysis and Inflation Dickinson Brothers,...Ch. 6 - Project Evaluation Aday Acoustics, Inc., projects...Ch. 6 - Calculating Required Savings A proposed...Ch. 6 - Calculating a Bid Price Another utilization of...Ch. 6 - Prob. 31QPCh. 6 - Prob. 32QPCh. 6 - Replacement Decisions Suppose we are thinking...Ch. 6 - Prob. 34QPCh. 6 - Project Analysis and Inflation The Biological...Ch. 6 - Prob. 36QPCh. 6 - Prob. 37QPCh. 6 - Prob. 38QPCh. 6 - Prob. 1MC1Ch. 6 - GOODWEEK TIRES, INC. After extensive research and...
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Similar questions
- Asset Purchase Price BWP Inc. is considering the purchase of an asset. BWPs required rate of return on new assets is 12%. The expected net cash inflows generated by the new asset are as follows: Required: Given that the net cash inflows can be realized, what is the maximum amount BWP should be willing to pay for the new asset? If BWP pays that amount, at what amount should BWP recognize the asset on the balance sheet? Assume that each cash inflow occurs at the end of the year. (Contributed by Norma C. Powell)arrow_forwardAssume San Lucas Corporation in MAD 26-1 assigns the following probabilities to the estimated annual net cash flows: a. Compute the expected value of the annual net cash flows. b. Determine the expected net present value of the equipment, assuming a desired rate of return of 10% and the expected annual net cash flows computed in part (a). Use the present value tables (Exhibits 2 and 5) provided in the chapter in determining your answer. c. Based on your results in parts (a) and (b), should San Lucas Corporation invest in the equipment?arrow_forwardStaten Corporation is considering two mutually exclusive projects. Both require an initial outlay of 150,000 and will operate for five years. The cash flows associated with these projects are as follows: Statens required rate of return is 10%. Using the net present value method and the present value table provided in Appendix A, which of the following actions would you recommend to Staten? a. Accept Project X and reject Project Y. b. Accept Project Y and reject Project X. c. Accept Projects X and Y. d. Reject Projects X and Y.arrow_forward
- CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE PROJECTS Project S requires an initial outlay at t = 0 of 17,000, and its expected cash flows would be 5,000 per year for 5 years. Mutually exclusive Project L requires an initial outlay at t = 0 of 30,000, and its expected cash flows would be 8,750 per year for 5 years. If both projects have a WACC of 12%, which project would you recommend? Explain.arrow_forwardCalculate the cash flows for each year. Based on these cash flows and the average project cost of capital, what are the projects NPV, IRR, MIRR, PI, payback, and discounted payback? Do these indicators suggest that the project should be undertaken?arrow_forwardConsider a project with the following cash flows: Time 0 1 2 3 4 5 CF -$5,000 $5,000 $4,000 $2,000 $1,000 -$6,000 Please round your answer to two decimal places. (e.g. 12345.67 for $12,345.67; 12.34 for 12.34%) a) What is the NPV of this project if the cost of capital is 10%? b) To calculate the MIRR, find the modified cash flow at year 0 c) What is the MIRR of this project?arrow_forward
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