16
doc
keyboard_arrow_up
School
University of the Punjab *
*We aren’t endorsed by this school
Course
504
Subject
Finance
Date
Nov 24, 2024
Type
doc
Pages
2
Uploaded by Bawarrai
[QUESTION] [Problem 14.2]
Smith, Jones, and Nguyen, Inc., is faced with several possible investment projects. For each, the
total cash outflow required will occur in the initial period. The cash outflows, expected net
present values, and standard deviations are given in the following table. All projects have been
discounted at the risk-free rate, and it is assumed that the distributions of their possible net
present values are normal.
a. Are there some projects that are clearly dominated by others with respect to expected value
and standard deviation? With respect to expected value and coefficient of variation?
b. What is the probability that each of the projects will have a net present value less than zero?
[ANSWER]
Project
E(NPV)
σNPV
CVNPV
A
$10,000
$20,000
2.00
B
10,000
30,000
3.00
C
25,000
10,000
0.40
D
5,000
10,000
2.00
E
75,000
75,000
1.00
On the basis of E(NPV) and standard deviation of NPV, ...
-
C dominates A, B, and D;
-
A dominates B and D; and
-
E neither dominates nor is dominated by any project.
On the basis of E(NPV) and coefficient of variation of NPV, ...
-
C dominates A, B, and D;
-
E dominates A, B, and D; and
-
A dominates B and D.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
Related Questions
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 14 percent, and that the maximum allowable payback and discounted payback statistic for the project are 2 and 3 years, respectively. Time 0 1 2 3 4 5 6 Cash Flow −1,010 110 490 690 690 290 690 Use the payback decision rule to evaluate this project; should it be accepted or rejected? Multiple Choice
4.00 years, reject
0 years, accept
2.59 years, reject
1.16 years, accept
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 12 percent, and that the maximum allowable payback and discounted payback statistic for the project are 2 and 3 years, respectively.
Time
0
1
2
3
4
5
6
Cash Flow
-1,150
30
570
770
770
370
770
Use the NPV decision rule to evaluate this project; should it be accepted or rejected?
Multiple Choice
A. $968.66, accept
B. $2,118.66, accept
C. $-495.13, reject
D. $864.87, accept
arrow_forward
15.
Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows
Group of answer choices
The lower the WACC used to calculate it, the lower the calculated NPV will be.
If a project's NPV is less than zero, then its IRR must be less than the WACC.
The NPV of a relatively low-risk project should be found using a relatively high WACC.
A project's NPV is found by compounding the cash inflows at the IRR to find the terminal value (TV), then discounting the TV at the WACC.
If a project's NPV is greater than zero, then its IRR must be less than zero.
arrow_forward
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 13 percent, and that the maximum allowable payback and discounted payback statistic for the project are 2 and 3 years, respectively.
Time
0
1
2
3
4
5
6
Cash Flow
-1,110
70
530
730
730
330
730
Use the payback decision rule to evaluate this project; should it be accepted or rejected?
Multiple Choice
A. 1.10 years, accept
B. 4.00 years, reject
C. 2.70 years, reject
D. 0 years, accept
arrow_forward
Data table
(Click on the following icon in order to copy its contents into a spreadsheet.)
Cash Flow Today ($ millions)
Project
A
-6
B
с
2
25
L
Cash Flow in One Year ($ millions)
22
5
- 8
<
arrow_forward
A project under consideration has an internal rate of return of 13% and a beta of 0.6. The risk-free rate is 8%, and the expected rate of return on the market portfolio is 13%.
a. What is the required rate of return on the project? (Do not round intermediate calculations. Enter your answer as a whole percent.)
b. Should the project be accepted? Y/N
c. What is the required rate of return on the project if its beta is 1.60? (Do not round intermediate calculations. Enter your answer as a whole percent.)
d. If project's beta is 1.60, should the project be accepted? Y/N
arrow_forward
Consider the given problem. If your risk-adjusted discount rate is 18%, is this project justifiable?
arrow_forward
A project has a forecasted cash flow of $118 in year 1 and $129 in year 2. The interest rate is 5%, the estimated risk premium on the
market is 12%, and the project has a beta of 0.58. If you use a constant risk-adjusted discount rate, answer the following:
a. What is the PV of the project?
b. What is the certainty-equivalent cash flow in year 1 and year 2?
c. What is the ratio of the certainty-equivalent cash flows to the expected cash?
arrow_forward
A project under consideration has an internal rate of return of 18% and a beta of 0.5. The risk-free rate is 6%, and the expected rate of
return on the market portfolio is 18%.
a. What is the required rate of return on the project? (Do not round intermediate calculations. Enter your answer as a whole
percent.)
b. Should the project be accepted?
c. What is the required rate of return on the project if its beta is 1.50? (Do not round intermediate calculations. Enter your answer as
a whole percent.)
d. If project's beta is 1.50, should the project be accepted?
a.
Required rate of return
%
b.
Accept the project
с.
Required rate of return
d.
Accept the project
arrow_forward
Your firm has identified three potential investment projects. The projects and their cash flows
are shown here:
Project
Cash Flow Today ($)
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?
arrow_forward
48. 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_forward
man.4
arrow_forward
A project has a forecasted cash flow of $121 in year 1 and $132 in year 2. The interest rate is 8%, the estimated risk premium on the market is 10.25%, and the project has a beta of 0.61. If you use a constant risk-adjusted discount rate, answer the following:
What is the PV of the project?
What is the certainty-equivalent cash flow in year 1 and year 2?
What is the ratio of the certainty-equivalent cash flows to the expected cash?
arrow_forward
Ehrmann Data Systems is considering a project that has the following cash flow and WACC data. What is
the project's MIRR? Note that a project's projected MIRR can be less than the WACC (and even negative),
in which case it will be rejected.
)
WACC:
Year
Cash flows
a. 21.67%
O b. 18.17%
c. 22.69%
d. 28.23%
e. 27.23%
11.50%
0
-$1,000
1
$550
2
$550
3
$550
arrow_forward
The expected return for the investment is ???
The standard deviation is ???
While the expected return for the risk-free assets, Treasury Bills, is ???
The standard deviation is ???
arrow_forward
A good approximation to use for the return on an average-risk project would be today’s interest rate on Treasury bills plus a risk premium of ____ percentage points.
1.8
6.5
7.0
8.0
11.7
Give typing answer with explanation and conclusion
arrow_forward
SEE MORE QUESTIONS
Recommended textbooks for you
Related Questions
- 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 14 percent, and that the maximum allowable payback and discounted payback statistic for the project are 2 and 3 years, respectively. Time 0 1 2 3 4 5 6 Cash Flow −1,010 110 490 690 690 290 690 Use the payback decision rule to evaluate this project; should it be accepted or rejected? Multiple Choice 4.00 years, reject 0 years, accept 2.59 years, reject 1.16 years, acceptarrow_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 12 percent, and that the maximum allowable payback and discounted payback statistic for the project are 2 and 3 years, respectively. Time 0 1 2 3 4 5 6 Cash Flow -1,150 30 570 770 770 370 770 Use the NPV decision rule to evaluate this project; should it be accepted or rejected? Multiple Choice A. $968.66, accept B. $2,118.66, accept C. $-495.13, reject D. $864.87, acceptarrow_forward15. Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows Group of answer choices The lower the WACC used to calculate it, the lower the calculated NPV will be. If a project's NPV is less than zero, then its IRR must be less than the WACC. The NPV of a relatively low-risk project should be found using a relatively high WACC. A project's NPV is found by compounding the cash inflows at the IRR to find the terminal value (TV), then discounting the TV at the WACC. If a project's NPV is greater than zero, then its IRR must be less than zero.arrow_forward
- Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 13 percent, and that the maximum allowable payback and discounted payback statistic for the project are 2 and 3 years, respectively. Time 0 1 2 3 4 5 6 Cash Flow -1,110 70 530 730 730 330 730 Use the payback decision rule to evaluate this project; should it be accepted or rejected? Multiple Choice A. 1.10 years, accept B. 4.00 years, reject C. 2.70 years, reject D. 0 years, acceptarrow_forwardData table (Click on the following icon in order to copy its contents into a spreadsheet.) Cash Flow Today ($ millions) Project A -6 B с 2 25 L Cash Flow in One Year ($ millions) 22 5 - 8 <arrow_forwardA project under consideration has an internal rate of return of 13% and a beta of 0.6. The risk-free rate is 8%, and the expected rate of return on the market portfolio is 13%. a. What is the required rate of return on the project? (Do not round intermediate calculations. Enter your answer as a whole percent.) b. Should the project be accepted? Y/N c. What is the required rate of return on the project if its beta is 1.60? (Do not round intermediate calculations. Enter your answer as a whole percent.) d. If project's beta is 1.60, should the project be accepted? Y/Narrow_forward
- Consider the given problem. If your risk-adjusted discount rate is 18%, is this project justifiable?arrow_forwardA project has a forecasted cash flow of $118 in year 1 and $129 in year 2. The interest rate is 5%, the estimated risk premium on the market is 12%, and the project has a beta of 0.58. If you use a constant risk-adjusted discount rate, answer the following: a. What is the PV of the project? b. What is the certainty-equivalent cash flow in year 1 and year 2? c. What is the ratio of the certainty-equivalent cash flows to the expected cash?arrow_forwardA project under consideration has an internal rate of return of 18% and a beta of 0.5. The risk-free rate is 6%, and the expected rate of return on the market portfolio is 18%. a. What is the required rate of return on the project? (Do not round intermediate calculations. Enter your answer as a whole percent.) b. Should the project be accepted? c. What is the required rate of return on the project if its beta is 1.50? (Do not round intermediate calculations. Enter your answer as a whole percent.) d. If project's beta is 1.50, should the project be accepted? a. Required rate of return % b. Accept the project с. Required rate of return d. Accept the projectarrow_forward
- Your firm has identified three potential investment projects. The projects and their cash flows are shown here: Project Cash Flow Today ($) 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?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_forwardman.4arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you