3. If the opportunity cost of capital is 11%, which of these projects is worth pursuing? Find the NPV of both projects. 4. Suppose that you can only choose one of these projects. Which is more favourable to the firm given that the discount rate remains at 11%? (Which has the higher NPV) 5. Which project would you choose if the opportunity cost of capital were 16%? (NPV/IRR)

3. If the opportunity cost of capital is 11%, which of these projects is worth pursuing? Find the NPV of both projects. 4. Suppose that you can only choose one of these projects. Which is more favourable to the firm given that the discount rate remains at 11%? (Which has the higher NPV) 5. Which project would you choose if the opportunity cost of capital were 16%? (NPV/IRR)

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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H5. 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 details
The Weiland Computer Corporation is trying to choose between the following mutually exclusive design projects, P1 and P2: Year 1 3 Cash flows (P1) -$53,000 27,000 27,000 27,000 Cash flows (P2) -$16,000 9,100 9,100 9,100 a. If the discount rate is 10 percent and the firm applies the Net Present Value (NPV) decision rule, which project should the firm accept? b. If the firm applies the profitability index (PI) decision rule, which project should it take?
antonio would like to replace his golf clubs with a custom measured set. a local sporting goods megastore is advertising custom clubs for $800. including a new bag. in store financing is avabiable at 2 percent or he can choose not to renew his S500 certifcate of deposit, which just matured, the adverstised CD renewl rate is 2 percent. antonio knows yaxes but he knows hell pay taxes (25% federal taces and 5.75% state taxes) on the CD intrest earnngs, should he cash in the CD or use the in store fincnacing why?
3. Project A and Project B are mutually exclusive. Project A has an IRR of 22.5 and Project B has an IRR of 30.8. The two projects happen to have equal net present value at a discount rate of 16.25%. The firms cost of capital is 12 percent. Explain with a graph, which project creates more value and which project should be chosen.
5. I need help with multiple choice finance home work question If a project has a NPV of zero, the project: Has a discounted payback period that is shorter than the life of the project. Has a profitability index that is greater than one. Should be accepted even if the firm has alternative investments with a positive NPV. Should be rejected. Is expected to earn a return equal to the firm's required return.
What is the payback period on each of the above projects? Given that you wish to use the payback rule with a cutoff period of two years, which projects would you accept? Why? If you use a cutoff period of three years, which projects would you accept? Why? If the opportunity cost of capital is 10%, which projects have positive NPVs? How do you know? “If a firm uses a single cutoff period for all projects, it is likely to accept too many short-lived projects.” Is this statement true or false? How do you know? If the firm uses the discounted-payback rule, will it accept any negative NPV projects? Will it turn down any positive NPV projects? How do you know?
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The table below shows internal rate of return for three investment projects A, B and C and there differences. By capital investment, A B> A O b. A>C> B O c. C>A> B O d. B>A> c O e. A>B> C
A2. (PaybackandNPV)Threeprojectshavethecashflowsgivenhere.Thecostofcapitalis10%. a. Calculate the paybacks for all three projects. Rank the projects from best to worst based on their paybacks. Calculate the NPVs for all three projects. Rank the projects from best to worst based on their NPVs c. Why are these two sets of rankings different? YEAR 0 1 2 3 4 5Project 1 −10 4 3 2 1 5 Project 2 −10 1 2 3 4 5 Project 3 −10 4 3 2 1 10
The table below shows internal rate of return for three investment projects A, B and C and there differences. By capital investment, A С> В O b. B > C>A O C. A> B>C O d. C>A>B O e. C> B> A
How did you find this amount because thourgh Excel spreeshit it gives another sum Now, let's address Rhule's concern about the cost of capital being off 300 basis points (3%): If the cost of capital is off by 300 basis points (10% -3% = 7%), we would recalculate the NPV using the new discount rate of 7% and check if the project still yields a positive NPV. NPV (at 7 %) = [( $6.77 million * ((1 - (1 + 0.07)^(- 10)) / 0.07)] - $16.5 million NPV (at 7%) = [$6.77 million * (1 - 0.508) / 0.07] - $16.5 million NPV (at 7%) = [$ 6.77 million *0.492/0.07] - $16.5 million Explanation: NPV (at 7%) = $34.6512 million - $16.5 million NPV ( at 7%) = $18.1512 million With a cost of capital of 7%, the NPV of the project is still positive at $18.1512 million. This indicates that even if the cost of capital is off by 300 basis points (3%), the project remains financially feasible and attractive.:;
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