11. (2 marks) Bill plans to open a do-it-yourself dog-bathing centre in a storefront. The bathingequipment will cost $160,000. Bill expects the after-tax cash inflows to be $40,000 annually forseven years, after which he plans to scrap the equipment and retire to the beaches of Jamaica.Assume the required return is 17%. What is the project's IRR? Should it be accepted?A. 12.2%; yesB. 12.2%; noC. 16.3%; yesD. 16.3%; noE. 17%; indifferent

IRR is also known as Internal rate of Return. It is a capital budgeting technique which helps in…

Answered: 11. (2 marks) Bill plans to open a…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Ashvini
123 Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows. Campbell Manufacturing is considering the purchase of a new welding system. The cash benefits will be $480,000 per year. The system costs $1,550,000 and will last 10 years. Evee Cardenas is interested in investing in a women's specialty shop. The cost of the investment is $180,000. She estimates that the return from owning her own shop will be $55,000 per year. She estimates that the shop will have a useful life of 6 years. Barker Company calculated the NPV of a project and found it to be $63,900. The project's life was estimated to be 8 years. The required rate of return used for the NPV calculation was 10%. The project was expected to produce annual after-tax cash flows of $135,000. Required: 1. Compute the NPV for Campbell Manufacturing, assuming a discount rate of 12%. If required, round all present value calculations to the nearest dollar. Use the minus sign to indicate a…
You own a coal mining company and are considering opening a new mine. The mine will cost $117.1 million to open. If this money is spent immediately, the mine will generate $21.5 million for the next 10 years. After that, the coal will run out and the site must be cleaned and maintained at environmental standards. The cleaning and maintenance are expected to cost $1.9 million per year in perpetuity. What does the IRR rule say about whether you should accept this opportunity? If the cost of capital is 8.1%, what does the NPV rule say? Use the graph below to determine the IRR(s) in the problem. NPV ($ millions) 31- 21- NPV of the Investment in the Coal Mine 5 10 15 20 Discount Rate (%) What does the IRR rule say about whether you should accept this opportunity? (Select the best choice below.) A. Accept the opportunity because the IRR is greater than the cost of capital. O B. The IRR is r= 11.83%, so accept the opportunity. O C. Reject the opportunity because the IRR is lower than the 8.1%…
Tom is considering purchasing a $22400 car. After five years, he will be able to sell the vehicle for $8000. Petrol costs will be $2000 per year, insurance $600 per year, and parking $600 per year. Maintenance costs for the first year will be $1000, rising by $400 per year thereafter. The alternative is for Tom to take taxis everywhere. This will cost an estimated $6000 per year. Tom will rent a vehicle each year at a total cost (to year-end) of $600 for the family vacation, if he has no car. If Tom values money at 11 percent annual interest. What is the annual worth of buying a car? Should he buy a car? Enter YES or NO in the units box. Note: (Use a negative sign (-) for an overall cost)

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