An advertising campaign will cost $450,000 for planning and $50,000 in each of the next five years. It is expected to increase revenues permanently by $50,000 per year. Additional revenues will be gained in the pattern of an arithmetic gradient with $25,000 in the first year declining by $5,000 per year to zero in the sixth year. Estimate the IRR of this investment. O 7% < IRR < 8% O 8% < IRR < 9% O 9% < IRR < 10% O 10% < IRR < 11% O 11% < IRR < 12%

An advertising campaign will cost $450,000 for planning and $50,000 in each of the next five years. It is expected to increase revenues permanently by $50,000 per year. Additional revenues will be gained in the pattern of an arithmetic gradient with $25,000 in the first year declining by $5,000 per year to zero in the sixth year. Estimate the IRR of this investment. O 7% < IRR < 8% O 8% < IRR < 9% O 9% < IRR < 10% O 10% < IRR < 11% O 11% < IRR < 12%

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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Find internal rate of return of a project with an initial cost of $43,000, expected net cash inflows of $9,550 per year for 8 years, and a cost of capital of 9.35%. Round your answer to two decimal places. For example, if your answer is $345.667 round as 345.67 and if your answer is .05718 or 5.718% round as 5.72. A. 15.64% B. 14.90% C. 13.70% D. 14.75% E. 11.17%
What is the NPV of a project that costs $38,000 today and is expected to generate annual cash inflows of $9,000 for the next 7 years, followed by a final inflow of $15,000 in year 8. Cost of capital is 7.4%. Round to the nearest cent.
1.. A company must choose between two investments. Investment C requires an immediate outlay of $53,000 and then, in two years, another investment of $33,000. Investment D requires annual investments of $25,000 at the beginning of each of the first four years. C would return annual profits of $17,500 for 10 years beginning with the first year. D’s profits would not start until Year 4 but would be $36,500 in Years 4 to 10 inclusive. The residual values after 10 years are estimated to be $33,000 for C and $23,000 for D. a. Which investment should the company choose if its cost of capital is 10%? The company should choose (Click to select) b. How much more is the preferred project worth today? (Do not round intermediate calculations and round your final answer to the nearest whole dollar.) The preferred project is worth $ more today
Chase Brew Inc is considering an investment with the following information: initial investment in assets = $1,600,000 to be depreciated to $0 via straight-line method over 8-year project life sales will increase by $1,750,000/year expenses will increase by $1,240,000/year firm's marginal tax rate is 28% What is the incremental after-tax cash flow (OCF) per year associated with the following project? Enter answer in dollars, rounded to the nearest dollar.
Motel Company is analyzing a capital expenditure that will involved a cash out lay of $208,240. Estimated cash flow are expected to be $40,000 annually for seven years. The present value factors for an annuity of $1 for seven years at interest of 6%, 8%, 10%, and 12% are 5.582, 5.206, 4.868, and 4.564. The internal rate of return for this investment is: 10% 6% 12% 8%
A company needs to decide whether or not to proceed with a 8-year project, which is expected to create after-tax cash inflows of $375,000 annually during the 8 years. A $2,000,000 cash outflow would be required at the begininng of the project. If the company requires a 9% return on investment, what is the NPV for this project? 4
Snowflake Resorts is considering investing in a project that has a net investment of $240,000. This project will return positive net cash flows annually for the next 5 years of $80,000 per year. Snowflake Resorts requires a 12% return on all of its investments. The payback period of this investment is ________ years 5 3 4 2 The net present value of this project is $65,355 $48,384 $85,652 $57,635 The profitability index of this project is 2016 5924 7350 3852 When projects have scale differences, only the Net Present Value method will rank the projects correctly True False Fees paid to investment bankers and lawyers for issuing securities are called Component costs Issuance costs Security costs Licensing costs Purposes for considering a capital project may include which of the following Cost reductions Growth projects Government required projects All of the above When the weighted average cost of capital for a project is considered on an after tax…
Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projects: Year Sales (Revenues) Cost of Goods Sold (50% of Sales) Depreciation = EBIT 0 A. $66,600 B. $55,500 C. $59,200 D. $74,000 Taxes (20%) = unlevered net income + Depreciation + changes to working capital - capital expenditures The free cash flow for the last year of Epiphany's project is closest to: 1 150,000 75,000 20,000 55,000 11,000 44,000 20,000 - 5,000 - 90,000 2 150,000 75,000 20,000 55,000 11,000 44,000 20,000 - 5,000 3 150,000 75,000 20,000 55,000 11,000 44,000 20,000 10,000
Revenues generated by a new fad product are forecast as follows: Year Revenues 1 $50,000 2 35,000 3 30,000 4 20,000 Thereafter 0 Expenses are expected to be 40% of revenues, and working capital required in each year is expected to be 20% of revenues in the following year. The product requires an immediate investment of $60,000 in plant and equipment. a. What is the initial investment in the product? Remember working capital. b. If the plant and equipment are depreciated over 4 years to a salvage value of zero using straight-line depreciation, and the firm’s tax rate is 20%, what are the project cash flows in each year? Assume the plant and equipment are worthless at the end of 4 years. c. If the opportunity cost of capital is 10%, what is the project's NPV? d. What is the project IRR?
A company's weighted average cost of capital is 9.4% per year. A project requires an investment of $15,000 today and it is expected to generate after-tax cash flows of $9,000 at the end of year 1, $5,000 at the end of year 2, and $4,000 at the end of year 3. What is the project's annual modified internal rate of return (MIRR)? A) 9.8% B) 10.5% C) 12.3% D) 1 11.4% E) 8.9%
The company estimates that a project with an initial investment of -$25 will produce ten positive cash flows of $4.3 a year at the end of each of the next 10 years. The project's cost of capital is 11%. One year from now, there is a 40% chance that the product demand will be low, in which case the yearly cash flows will be only $2.00. One year from now, there is 60% chance that the product demand will be higher, and the yearly cash flows will be $4.8. Should the company exercise investment timing option and wait a year before proceeding? Prove numerically.
An investment of $50,000 in R&D results in additional revenue of $28,720 after 5 years and another revenue of $61,892 after 10 years. What is the rate of return on the investment?

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