EBK CORPORATE FINANCE
4th Edition
ISBN: 8220103145947
Author: DeMarzo
Publisher: PEARSON
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Chapter 7, Problem 26P
Summary Introduction
To determine: The best project using the incremental
Introduction:
IRR helps to make capital-budget decisions. IRR relies on the
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Students have asked these similar questions
You work for an outdoor play structure manufacturing company and are trying to decide
between the following two projects:
Year-End Cash Flows ($ thousands)
Project
0
1
2
Playhouse (minor project) -30
19
18
Fort (major poject)
-75
38
52
You can undertake only one project. If your cost of capital is
6%, which one should you choose?
O Playhouse because the incremental IRR is 10.56%
O Playhouse because the IRR of Fort is lower
Playhouse because the NPV of Playhouse is higher
O Fort because the incremental IRR is 10.56%
You work for an outdoor play structure manufacturing company and are trying to
decide between the following two projects:
Year-End Cash Flows ($ thousanch)
2
21
51
Project
0
Playhouse (minor project) -29
Fort (major poject)
-79
1
17
39
You can undertake only one project. If your cost of capital is
6%, which one should you choose?
Playhouse because the incremental IRR is 2.52%
O Playhouse because the IRR of Fort is lower
O Not sure, it depends
O Fort because the incremental IRR is 2.52%
Do the following problems. You must show your work.c) Find the IRR and MIRR of the following project and make your decision. Assume that the project's cost of capital (or WACC) is 4%.
Project X that costs $30 million is expected to generate $13m per year for 3 years. Is this project acceptable?
Chapter 7 Solutions
EBK CORPORATE FINANCE
Ch. 7.1 - Explain the NPV rule for stand-alone projects.Ch. 7.1 - What does the difference between the cost of...Ch. 7.2 - Prob. 1CCCh. 7.2 - If the IRR rule and the NPV rule lead to different...Ch. 7.3 - Can the payback rule reject projects that have...Ch. 7.3 - Prob. 2CCCh. 7.4 - For mutually exclusive projects, explain why...Ch. 7.4 - What is the incremental RR and what are its...Ch. 7.5 - Prob. 1CCCh. 7.5 - Prob. 2CC
Ch. 7 - Your brother wants to borrow 10,000 from you. He...Ch. 7 - You are considering investing in a start-up...Ch. 7 - You are considering opening a new plant. The plant...Ch. 7 - Your firm is considering the launch of a new...Ch. 7 - Bill Clinton reportedly was paid 15 million to...Ch. 7 - FastTrack Bikes, Inc. is thinking of developing a...Ch. 7 - OpenSeas, Inc. is evaluating the purchase of a new...Ch. 7 - You are CEO of Rivet Networks, maker of ultra-high...Ch. 7 - You are considering an investment in a clothes...Ch. 7 - You have been offered a very long term investment...Ch. 7 - You are considering opening a new plant. The plant...Ch. 7 - Bill Clinton reportedly was paid 15 million to...Ch. 7 - Prob. 13PCh. 7 - Innovation Company is thinking about marketing a...Ch. 7 - You have 3 projects with the following cash flows:...Ch. 7 - You own a coal mining company and are considering...Ch. 7 - Prob. 17PCh. 7 - Prob. 18PCh. 7 - Prob. 19PCh. 7 - Prob. 20PCh. 7 - You are a real estate agent thinking of placing a...Ch. 7 - Prob. 22PCh. 7 - You are deciding between two mutually exclusive...Ch. 7 - You have just started your summer Internship, and...Ch. 7 - Prob. 25PCh. 7 - Prob. 26PCh. 7 - Prob. 27PCh. 7 - Prob. 28PCh. 7 - Prob. 29PCh. 7 - Prob. 30PCh. 7 - Prob. 31PCh. 7 - Prob. 32PCh. 7 - Prob. 33PCh. 7 - Orchid Biotech Company is evaluating several...
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- Ruby is looking at the results of a Capital Investment Appraisal. The report shows that, assuming a Cost of Capital of 10%, investing in a plant to manufacture a new clothing line would give a positive NPV and an IRR of 23%. Should the company buy the machine? NPV is positive and IRR is less than the Cost of Capital NPV is positive and IRR exceeds Cost of Capital. NPV does not provide enough information. IRR is higher than the Cost of Capitalarrow_forwardYou are considering the following two projects and can take only one. Your cost of capital is 10.7%. The cash flows for the two projects are as follows ($ million): a. What is the IRR of each project? b. What is the NPV of each project at your cost of capital? c. At what cost of capital are you indifferent between the two projects? d. What should you do? Data table (Click on the following icon in order to copy its contents into a spreadsheet.) a. What is the IRR of each project? Year 0 Year 1 Year 2 Year 3 Project A The IRR for project A is %. (Round to one decimal place.) $24 $31 $38 - $102 - $102 B $49 $38 $31 The IRR for project B is%. (Round to one decimal place.) b. What is the NPV of each project at your cost of capital? The NPV for project A is $ million. (Round to two decimal places.) Done The NPV for project B is $ million. (Round to two decimal places.) c. At what cost of capital are you indifferent between the two projects? You will be indifferent if the cost of capital is%.…arrow_forwardA firm has only $10,000 to invest and must choose between two projects. Project A returns $12,400 after a year while project B pays $15,609 after three years. If management wants to select the investment with the higher return, which alternative should be chosen? Calculate the return for each investment and indicate which option provides the higher return and explain why.arrow_forward
- Little Rhody Manufacturing needs to purchase a new central air-conditioning system for a plant. There are two choices. The first system costs $70,000 and is expected to last 6 years, and the second system costs $102,000 and is expected to last 9 years. Assume that the opportunity cost of capital is 12 percent. Which air-conditioning system should you purchase? Show your work. Hint: There are two ways to solve this. The hard way: Use formula for EAC The easy way: TMV exercise and solve for PMT assuming annual P/Y. Whichever has the lower PMT, go with that system. PV = cost. FV = 0, I/Y = 12%, N = Number of years. P/Y = 1arrow_forwardConsider the following projects, X and Y where the firm can only choose one. Project X costs $600 and has cash flows of $400 in each of the next 2 years. Project Y also costs $600, and generates cash flows of $500 and $275 for the next 2 years, respectively. Which investment should the firm choose if the cost of capital is 15 percent? Project X, since it has a higher NPV than Project Y Project Y, since it has a higher NPV than Project X neither, since both the projects have negative NPV neither, since both the projects have positive NPVarrow_forwardSuppose that you are considering two projects and only have the financial resources to choose one project. Project A has an internal rate of return (IRR) of 14.5% and Project B, an IRR of 23.5%. The cost of capital is 12%. Explain whether the IRR capital budgeting technique is suitable for you to determine your project selection.arrow_forward
- These questions are intended for self-study. Click the [solution] box to reveal a detailed solution. Two mutually exclusive investment projects have been presented to your company. Project A’s rate of return is 6%, and Project B’s rate of return is 8%. The cost of Project A is less than the cost of Project B. Incremental analysis yields a rate of return of 4%. If both alternatives have the same useful life and the MARR is 5%, which project should be chosen?arrow_forwardRicha is looking at the results of a Capital Investment Appraisal. The report shows that, assuming a Cost of Capital of 10%, investing in a plant to manufacture a new clothing line would give a positive NPV and an IRR of 23%. Should the company buy the machine? NPV is positive and IRRexceeds cost of capital. NPV is positive and IRR is less than cost of capital. NPV does not provide enough information. IRR is higher than the cost of capitalarrow_forwardYour boss hands you the following information about two mutually exclusive projects. She adds the following: "Our discount rate is 10% and both projects have IRRs over 20 %. Unfortunately, we are unable to implement both, so we will go with project A since it has the highest IRR of the two." How would you respond? Give a supporting numerical analysis. Projects A B Cost of Capital 10% 10% Ranking the projects by IRR would lead to results in (Round to the nearest dollar as needed.) IRR 570% 22% Initial Cash Flow - $2000 - $170,000 Cash Flow in One Year $13,400 $207,400 decision because the NPV of project A is $ projects being selected by the NPV and IRR rules. and the NPV of project B is $. This means that project has the higher NPV, whicharrow_forward
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