Connect 1 Semester Access Card for Fundamentals of Corporate Finance
11th Edition
ISBN: 9781259289392
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 9, Problem 14CRCT
a. Calculate the
b. Calculate the NPV of the project using the single future value calculated in the previous step and the initial outlay. It is easy to verify that you will gel the same NPV as in your original calculation only if you use the required return as the reinvestment rate in the previous step.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Q15. Which of the following is NOT potentially problematic for Internal Rate of Return (IRR)?
Group of answer choices
1. IRR cannot cope with multiple future cash flows
2. It is assumed that intermediate cash flow can be reinvested at the same rate as the project IRR
3. IRR may produce nonsense answers when there is unconventional cash flow with more than one change of sign'.
4. When comparing 2 projects with very different sensitivity to the assumed discount rate, IRR may conflict with Net Present Value
6.Calculate the project's Modified Internal Rate of Return (MIRR). What critical assumption does the MIRR make that differentiates it from the IRR?
TIP : look for the definition of Modified Internal Rate of Return, and then do it in excel, easy !!!
Year
Net Cash flow
Future Value of Net Cash flow
0
-$20.8
example
1
$4.5
$7.97 (n=6, i=10%)=fv(.1,6,,4.5)
2
$6.3
(n=5, i=10%)
3
$5.2
(n=4, i=10%)
4
$3.9
(n=3, i=10%)
5
$2.1
(n=2, i=10%)
6
$1.3
(n=1, i=10%)
7
$0.5
(n=0, i=10%)
Sum = $XX.XX
MIRR = ( in excel ) Rate ( 7,-20.8, xx.xx)
7.Where does the value of MIRR fall relative to the discount rate and IRR?
Reconsider Example 11.6, where the expected cash flows for the Capstone project arePeriod 0 1 2 3 4 5Cash Flow -$55,000 $17,094 $20,439 $20,069 $20,212 $29,660Suppose that Capstone consider the MicroCHP project to be just one of their normal risky projects. Then the appropriate discount rate to use is 15%. However, Capstone considers the MicroCHP project to be much riskier than normal projects, so it believes an additional risk premium of 6.93% should be added. If management has decided to use a risk-adjusted discount rate of 21.93% to compensate for the uncertainty of the cash flows, is this project acceptable?
Chapter 9 Solutions
Connect 1 Semester Access Card for Fundamentals of Corporate Finance
Ch. 9.1 - Prob. 9.1ACQCh. 9.1 - Prob. 9.1BCQCh. 9.2 - Prob. 9.2ACQCh. 9.2 - Why do we say that the payback period is, in a...Ch. 9.3 - Prob. 9.3ACQCh. 9.3 - What advantage(s) does the discounted payback have...Ch. 9.4 - What is an average accounting rate of return...Ch. 9.4 - What are the weaknesses of the AAR rule?Ch. 9.5 - Prob. 9.5ACQCh. 9.5 - Is it generally true that an advantage of the IRR...
Ch. 9.6 - What does the profitability index measure?Ch. 9.6 - How would you state the profitability index rule?Ch. 9.7 - Prob. 9.7ACQCh. 9.7 - If NPV is conceptually the best procedure for...Ch. 9 - Prob. 9.1CTFCh. 9 - Prob. 9.2CTFCh. 9 - Prob. 9.3CTFCh. 9 - Prob. 9.4CTFCh. 9 - What is a benefitcost ratio?Ch. 9 - Prob. 9.7CTFCh. 9 - Prob. 1CRCTCh. 9 - Net Present Value [LO1] Suppose a project has...Ch. 9 - Prob. 3CRCTCh. 9 - Prob. 4CRCTCh. 9 - Prob. 5CRCTCh. 9 - Net Present Value [LO1] Concerning NPV: a....Ch. 9 - Prob. 7CRCTCh. 9 - Profitability Index [LO7] Concerning the...Ch. 9 - Payback and Internal Rate of Return [LO2, 5] A...Ch. 9 - Prob. 10CRCTCh. 9 - Capital Budgeting Problems [LO1] What difficulties...Ch. 9 - Prob. 12CRCTCh. 9 - Modified Internal Rate of Return [LO6] One of the...Ch. 9 - Net Present Value [LO1] It is sometimes stated...Ch. 9 - Internal Rate of Return [LO5] It is sometimes...Ch. 9 - Calculating Payback [LO2] What is the payback...Ch. 9 - Calculating Payback [LO2] An investment project...Ch. 9 - Calculating Payback [LO2] Siva, Inc., imposes a...Ch. 9 - Calculating Discounted Payback [LO3] An investment...Ch. 9 - Calculating Discounted Payback [LO3] An investment...Ch. 9 - Calculating AAR [LO4] Youre trying to determine...Ch. 9 - Calculating IRR [LO5] A firm evaluates all of its...Ch. 9 - Calculating NPV [LO1] For the cash flows in the...Ch. 9 - Calculating NPV and IRR [LO1, 5] A project that...Ch. 9 - Calculating IRR [LO5] What is the IRR of the...Ch. 9 - Prob. 11QPCh. 9 - NPV versus IRR [LO1, 5] Garage, Inc., has...Ch. 9 - Prob. 13QPCh. 9 - Problems with IRR [LO5] Light Sweet Petroleum,...Ch. 9 - Prob. 15QPCh. 9 - Problems with Profitability Index [LO1, 7] The...Ch. 9 - Comparing Investment Criteria [LO1, 2, 3, 5, 7]...Ch. 9 - NPV and Discount Rates [LO1] An investment has an...Ch. 9 - MIRR [L06] RAK Corp. is evaluating a project with...Ch. 9 - Prob. 20QPCh. 9 - Prob. 21QPCh. 9 - Cash Flow Intuition [LO1, 2] A project has an...Ch. 9 - Payback and NPV [LO1, 2] An investment under...Ch. 9 - Prob. 24QPCh. 9 - NPV Valuation [LO1] The Yurdone Corporation wants...Ch. 9 - Problems with IRR [LO5] A project has the...Ch. 9 - Problems with IRR [LO5] McKeekin Corp. has a...Ch. 9 - Prob. 28QPCh. 9 - Prob. 1MCh. 9 - Prob. 2MCh. 9 - Bullock Gold Mining Seth Bullock, the owner of...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- 8) Modern Refurbishing Inc. is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's IRR can be less than the cost of capital (and even negative), in which case it will be rejected. Year 0 1 2 3 4 Cash flows −$850 $300 $290 $280 $270 a. 15.89% b. 13.13% c. 19.22% d. 17.48% e. 14.44%arrow_forwardH5. Discuss the following statement: If a firm has only independent projects, a constant WACC, and projects with normal cash flows, the NPV and IRR methods will always lead to identical capital budgeting decisions. What does this imply about the choice between IRR and NPV? If each of the assumptions were changed (one by one), how would your answer change? Explain with detailsarrow_forward6.2 (q5) Which of the following is NOT a definition of the internal rate of return of a project? Select one: a. The average profit over the life of a project based on the depreciated book value of the assets used in the project. b. The discount rate that results in an NPV for the project of zero. c. The rate of return on invested capital, based on cash flows and taking into account the time value of money. d. None of the above. (In other words, all of the above ARE definitions of the internal rate of return of a project.) Clear my choicearrow_forward
- 11. Under certain conditions, a project may have more than one IRR. One such condition is when, in addition to the initial investment at time = 0, a negative cash flow (or cost) occurs at the end of the project's life Group of answer choices True Falsearrow_forward4. Modified internal rate of return (MIRR) The IRR evaluation method assumes that cash flows from the project are reinvested at the same rate equal to the IRR. However, in reality the reinvested cash flows may not necessarily generate a return equal to the IRR. Thus, the modified IRR approach makes a more reasonable assumption other than the project’s IRR. Consider the following situation: Grey Fox Aviation Company is analyzing a project that requires an initial investment of $450,000. The project’s expected cash flows are: Year Cash Flow Year 1 $300,000 Year 2 –175,000 Year 3 475,000 Year 4 450,000 Grey Fox Aviation Company’s WACC is 10%, and the project has the same risk as the firm’s average project. Calculate this project’s modified internal rate of return (MIRR): 26.73% 27.89% 20.92% 23.24% If Grey Fox Aviation Company’s managers select projects based on the MIRR criterion, they shouldreject this independent…arrow_forward7) Consider the following project: Year Cash Flow 0 – $ 3,024 1 17,172 2 – 36,420 3 34,200 4 – 12,000 Year Cash Flow 0 -3,024 1 17,172 2 -36,420 3 34,200 4 -12,000 a) Determine the IRR (s) for this project. Do not use Excel sheet b) At which rates of return will the project be acceptable?arrow_forward
- 4. Modified internal rate of return (MIRR) The IRR evaluation method assumes that cash flows from the project are reinvested at the same rate equal to the IRR. However, in reality the reinvested cash flows may not necessarily generate a return equal to the IRR. Thus, the modified IRR approach makes a more reasonable assumption other than the project’s IRR. Consider the following situation: Green Caterpillar Garden Supplies Inc. is analyzing a project that requires an initial investment of $500,000. The project’s expected cash flows are: Year Cash Flow Year 1 $300,000 Year 2 –100,000 Year 3 450,000 Year 4 450,000 Green Caterpillar Garden Supplies Inc.’s WACC is 9%, and the project has the same risk as the firm’s average project. Calculate this project’s modified internal rate of return (MIRR): 22.81% 18.25% 21.67% 20.53%arrow_forward48. Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. a. A project's regular IRR is found by compounding the cash inflows at the WACC to find the present value (PV), then discounting the TV to find the IRR. b. If a project's IRR is smaller than the WACC, then its NPV will be positive. c. If a project's IRR is positive, then its NPV must also be positive. d. A project's IRR is the discount rate that causes the PV of the inflows to equal the project's cost. e. A project's regular IRR is found by compounding the initial cost at the WACC to find the terminal value (TV), then discounting the TV at the WACC.arrow_forwardYear Cashflow Interest rate 11% 0 (294,000) 1 106,448 2 97,628 3 88,808 4 127,518 Calculate the Project's NPV, IRR, MIRR, and payback. Do these indicators suggest that the project should be accepted? Explainarrow_forward
- #28 * Incremental Analysis: Consider the following cash flows: Regarding Incremental Analysis techniques, which project should be selected as the base alternative? N A1 A2 0 -$4,000 -$15,000 1 $2,350 $7,200 2 $2,800 $9,225 3 $2,500 $9,330 A. A1 B. A2 C. I don’t have a clue how to determine this answer!!!! D. None of the above is the correct answer.arrow_forwardQuestion 1 Which one of the following statements is NOT correct? Group of answer choices If the initial cost of a project is increased, the net present value of that project will decrease. The MIRR is specifically designed to address conventional cash flows. If the internal rate of return equals the required return, the net present value will equal zero. Net present value is equal to the investment’s cash inflows discounted to today's dollars minus the initial cost of the investment. Net present value is negative when the required return exceeds the internal rate of return.arrow_forwardQ. A positive NPV forecast for a new project is reliable only if it is based on Multiple Choices: - forecasts of cash flows. - identifiable sources of economic rents. - Michael Porter's theories. - results from Monte Carlo analysis.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Financial & Managerial AccountingAccountingISBN:9781337119207Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage Learning
Accounting (Text Only)AccountingISBN:9781285743615Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage Learning
Financial & Managerial AccountingAccountingISBN:9781285866307Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage Learning
AccountingAccountingISBN:9781337272094Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.Publisher:Cengage Learning,
Financial & Managerial Accounting
Accounting
ISBN:9781337119207
Author:Carl Warren, James M. Reeve, Jonathan Duchac
Publisher:Cengage Learning
Accounting (Text Only)
Accounting
ISBN:9781285743615
Author:Carl Warren, James M. Reeve, Jonathan Duchac
Publisher:Cengage Learning
Financial & Managerial Accounting
Accounting
ISBN:9781285866307
Author:Carl Warren, James M. Reeve, Jonathan Duchac
Publisher:Cengage Learning
Accounting
Accounting
ISBN:9781337272094
Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:Cengage Learning,
Capital Budgeting Introduction & Calculations Step-by-Step -PV, FV, NPV, IRR, Payback, Simple R of R; Author: Accounting Step by Step;https://www.youtube.com/watch?v=hyBw-NnAkHY;License: Standard Youtube License