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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Chapter 8, Problem 17PS
Cost of capital* Epsilon Corp. is evaluating an expansion of its business. The cash-flow
The firm’s existing assets have a beta of 1.4. The risk-free interest rate is 4% and the expected return on the market portfolio is 12%. What is the project’s
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Students have asked these similar questions
Your firm has identified three potential investment projects. The projects and their cash flows
are shown here:
Project
Cash Flow Today ($)
Cash Flow in One Year ($)
A
-10
20
В
20
-10
Suppose all cash flows are certain and the risk-free interest rate is 10%.
a. What is the NPV of each project?
b. If the firm can choose only one of these projects, which should it choose?
c. If the firm can choose any two of these projects, which should it choose?
Epsilon Corp. is evaluating an expansion of its business. The cash-flow forecasts for the project are as follows:
Years
Cash Flow($ millions)
0
−230
1-8
51
The firm's existing assets have a beta of 1.4. The risk-free interest rate is 5% and the expected return on the market portfolio is 10%. What is the project's NPV? (Enter your answer in millions. A negative answer should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)
The following are two projects a firm is considering:
Project B
Cash Flow
Year
0
1
2
3
4
$2,939.01
Assuming that the relevant cost of capital for both projects is 11%, you should be able to determine
the net present value (NPV) and the internal rate of return (IRR) for both project. Assume now that
the firm has capital rationing, but knows that its true reinvestment rate is 20%, while its cost of
capital is 11 percent. Given this information, determine the modified net present value (MNPV) for
Project B.
O $2.479.00
O $2.965.10
O$3.479.89
Project A
Cash Flow
O $4,084.05
($10,000.00) ($11,000.00)
$3,000.00
$5,000.00
$4,000.00
$4,000 00
$5,000.00
$4,000.00
$2,000.00
$2,000.00
Chapter 8 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 8 - Portfolio risk and return Here are returns and...Ch. 8 - Efficient portfolios For each of the following...Ch. 8 - Sharpe ratio Use the long-term data on security...Ch. 8 - Efficient portfolios Figure 8.11 purports to show...Ch. 8 - CAPM Suppose that the Treasury bill rate is 6%...Ch. 8 - CAPM True or false? a. The CAPM implies that if...Ch. 8 - APT Consider a three-factor APT model. The factors...Ch. 8 - CAPM True or false? Explain or qualify as...Ch. 8 - Portfolio risk and return Look back at the...Ch. 8 - Portfolio risk and return Mark Harrywitz proposes...
Ch. 8 - Portfolio risk and return Ebenezer Scrooge has...Ch. 8 - Portfolio beta Refer to Table 7.5. a. What is the...Ch. 8 - CAPM The Treasury bill rate is 4%, and the...Ch. 8 - Portfolio risk and return Percival Hygiene has IO...Ch. 8 - Cost of capital Epsilon Corp. is evaluating an...Ch. 8 - Prob. 18PSCh. 8 - APT Consider the following simplified APT model:...Ch. 8 - Prob. 20PSCh. 8 - Prob. 21PSCh. 8 - Prob. 22PSCh. 8 - Prob. 23PSCh. 8 - Efficient portfolios Look again at the set of the...
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- Epsilon Corp. is evaluating an expansion of its business. The cash-flow forecasts for the project are as follows: Years Cash Flow($ millions) 0 −150 1-9 25 The firm's existing assets have a beta of 1. The risk-free interest rate is 3% and the expected return on the market portfolio is 10%. What is the project's NPV?arrow_forwardYou look at the rate of returns, and the betas of different capital investment options. To determine which should be pursued, you will look at Internal Rate of Return, the Capital Asset Pricing Model (Security Market Line), and the Weighted Average Cost of Capital. The expected return on the market is 12%, and the risk-free rate is 5%. Project Z: return = 17.0%, beta = 1.81 Project X: return = 10.5%, beta = .90 Project W: return = 10.0%, beta = .55 Project Y: return = 14.0%, beta = 1.10 a. Which projects should be accepted using the CAPM(SML) rule? Project W should be Project Y should be Project X should be and Project Z should bearrow_forwardThe risk-free rate is 7%. The expected rate of return on the stock market (S&P500) is 10%. What is the appropriate cost of capital for a project that has a beta of -0.2? Use CAPM formula. Select one: a. Cost of capital = 7.2% b. Cost of capital = 11% c. Cost of capital = 6.4% d. Cost of capital = 12%arrow_forward
- Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are 2.0 and 3.0 years, respectively. Time: 0 1 2 3 4 5 6 Cash flow: −$7,500 $1,180 $2,380 $1,580 $1,580 $1,380 $1,180 Use the NPV decision rule to evaluate this project. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answer to 2 decimal places.) NPV: ? Should it be accepted or rejected?multiple choice accepted rejectedarrow_forwardYour firm has identified three potential investment projects. The projects and their cash flows are shown here: Project Cash Flow Today Cash Flow in One Year A -10 20 B 5 5 C 20 -10 Suppose all cash flows are certain and the risk-free interest rate is 10%. (1) What is the NPV of each project? (2) If the firm can choose only one of these projects, which should it choose? (3) If the firm can choose any two of these projects, which should it choose?arrow_forwardYour firm has identified three potential investment projects. The projects and their cash flows are shown here: Cash Flow Today (millions) -$10 $5 $20 Cash Flow in One Year Project (millions) $20 $5 -$10 Suppose all cash flows are certain and the risk-free interest rate is 10%. a. What is the NPV of each project? b. If the firm can choose only one of these projects, which should it choose based on the NPV decision rule? c. If the firm can choose any two of these projects, which should it choose based on the NPV decision rule? ABCarrow_forward
- Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 7 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively. Time: 0 1 2 3 4 5 6 Cash flow: −$5,300 $1,190 $2,390 $1,590 $1,590 $1,390 $1,190 Use the IRR decision rule to evaluate this project. IRR ________%arrow_forwardYour firm has limited capital to invest and is therefore interested in comparing projects based on the profitability index (PI), as well as other measures. What is the PI of the project with the estimated cash flows below? The required rate of return is 18.1%. Round to 3 decimals. Year 0 cash flow = 720,000 Year 1 cash flow = -130,000 Year 2 cash flow = 540,000 Year 3 cash flow = 490,000 Year 4 cash flow = 480,000 Year 5 cash flow = 550,000 Answer:arrow_forwardSuppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 11 percent, and that the maximum allowable payback and discounted payback statistics for your company are 3 and 3.5 years, respectively. Time: Cash flow: 0 1 3 4 -$233,000 $65,600 $83,800 $140, 800 $121,800 MIRR Use the MIRR decision rule to evaluate this project. Note: Do not round intermediate calculations and round your final answer to 2 decimal places. 5 $81,000 %arrow_forward
- Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 11 percent, and that the maximum allowable payback and discounted payback statistics for your company are 3.0 and 3.5 years, respectively. Time: Cash flow: 0 1 2 -$241,000 $66,400 $84,600 Payback Use the payback decision rule to evaluate this project. Note: Round your answer to 2 decimal places. years 4 3 $141,600 $122,600 Should the project be accepted or rejected? (Click to select) 5 $81,800arrow_forwardSuppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 9 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively. Time: Cash flow: 0 -$15, 200 MIRR 1 $3,000 3 2 $4,200 $3,400 Use the MIRR decision rule to evaluate this project. (Do not round intermediate calculations and round your final answer to 2 decimal places.) % 5 $3,400 $3,200 6 $3,000arrow_forwardVu Trading Company is evaluating a project that has the estimated cash flows given here. The cost of capital is 14%. What is the project’s NPV? b. What is the profitability index? Year 0 1 2 3 4 Cash flow −100,000 30,000 30,000 60,000 60,000arrow_forward
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