ST-2CAPITAL BUDGETING CRITERIA You must analyze two projects, X and Y. Eachproject costs $10,000, and the firm's WACC is 12%. The expected net cash flows areas follows:23Project X -$10,000Project Y-$10,000$6,500$3,500$3,000$3,500$3,000$3,500$1,000$3,500a. Calculate each project's NPV, IRR, MIRR, payback, and discounted payback.b. Which project(s) should be accepted if they are independent?c. Which project(s) should be accepted if they are mutually exclusive?d. How might a change in the WACC produce a conflict between the NPV and IRRrankings of the two projects? Would there be a conflict if WACC were 5%? (Hint: Plotthe NPV profiles. The crossover rate is 6.21875%.)e. Why does the conflict exist?

NPV is the sum of present value of cash flows in the project WACC= 12% Year Cash Flows - Project…

Answered: ST-2 CAPITAL BUDGETING CRITERIA You…

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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B Assume the following information for a capital budgeting proposal with a five-year time horizon: Initial investment: Cost of equipment (zero salvage value) Annual revenues and costs: Sales revenues Variable expenses Depreciation expense Fixed out-of-pocket costs This proposal's simple rate of return is closest to: Multiple Choice O 27%. 16%. 19% 11% $ 485,000 $ 300,000 $ 130,000 $ 50,000 $ 40,000
Capital Budgeting Assume you are evaluating two mutually exclusive projects, the cash flows of which appear below and that your company uses a cost of capital of 13% to evaluate projects such as these. Time Project A Cash Flows Project B Cash Flows 0 -$46,800 -$63,600 1 -21,600 20,400 2 43,200 20,400 3 43,200 20,400 4 43,200 20,400 5 -28,800 20,400 Under what conditions on the cost of capital should project B be preferred to project A?
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Capital Budgeting Assume you are evaluating two mutually exclusive projects, the cash flows of which appear below and that your company uses a cost of capital of 12% to evaluate projects such as these. Time Project A Cash Flows Project B Cash Flows 0 -$300,000 -$405,000 1 -387,000 134,000 2 -193,000 134,000 3 -100,000 134,000 4 600,000 134,000 5 600,000 134,000 6 850,000 134,000 7 -180,000 0 Calculate the IRR and MIRR of projects A & B. Assume a reinvestment rate of 12% for the calculation of MIRR.
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Capital Budgeting Methods Project S has a cost of $11,000 and is expected to produce benefits (cash flows) of $3,400 per year for 5 years. Project L costs $23,000 and is expected to produce cash flows of $6,900 per year for 5 years. Calculate the two projects' NPVs, assuming a cost of capital of 14%. Do not round intermediate calculations. Round your answers to the nearest cent. Project S: $ Project L: $ Which project would be selected, assuming they are mutually exclusive? Based on the NPV values, Project S/Project L would be selected. Calculate the two projects' IRRs. Do not round intermediate calculations. Round your answers to two decimal places. Project S: % Project L: % Which project would be selected, assuming they are mutually exclusive? Based on the IRR values, Project S/Project L would be selected. Calculate the two projects' MIRRs, assuming a cost of capital of 14%. Do not round intermediate calculations. Round your answers to two decimal places. Project S: %…
You are a financial analyst for the Hittle Company. The director of capital budgeting has asked you to analyze two proposed capital investments, Projects X and Y. Each project has a cost of $10,000, and the cost of capital for each is 12%. The projects’ expected net cash flows are as follows: Expected Net Cash Flows Year Project X Project Y 0 −$10,000 −$10,000 1 6,500 3,500 2 3,000 3,500 3 3,000 3,500 4 1,000 3,500 a. Calculate each project’s payback period, net present value (NPV), internal rate of return (IRR), modified internal rate of return (MIRR), and profitability index (PI). b. Which project or projects should be accepted if they are independent? c. Which project should be accepted if they are mutually exclusive? d. How might a change in the cost of capital produce a conflict between the NPV and IRR rankings of these two projects? Would this conflict exist if r were 5%? (Hint: Plot the NPV profiles.) e. Why does the conflict exist?
NPV and EVA A project cost $2.5 million up front and will generate cash flows in perpetuity of $240,000. The firm's cost of capital is 9%. a. Calculate the project's NPV. b. Calculate the annual EVA in a typical year. c. Calculate the overall project EVA. a. The project's NPV is $nothing. (Round to the nearest dollar.) b. The annual project EVA in a typical year is $nothing. (Round to the nearest dollar.) c. The overall project EVA is $nothing. (Round to the nearest dollar.)
Capital Budgeting Assume you are evaluating two mutually exclusive projects, the cash flows of which appear below and that your company uses a cost of capital of 12% to evaluate projects such as these. Time Project A Cash Flows Project B Cash Flows 0 -$300,000 -$405,000 1 -387,000 134,000 2 -193,000 134,000 3 -100,000 134,000 4 600,000 134,000 5 600,000 134,000 6 850,000 134,000 7 -180,000 0 Determine the crossover point for these projects’ NPV profiles.
Capital Budgeting Assume you are evaluating two mutually exclusive projects, the cash flows of which appear below and that your company uses a cost of capital of 13% to evaluate projects such as these. Time Project A Cash Flows Project B Cash Flows 0 -$46,800 -$63,600 1 -21,600 20,400 2 43,200 20,400 3 43,200 20,400 4 43,200 20,400 5 -28,800 20,400 Assuming a cost of capital of 13%, which of these projects should be accepted?
Consider the cash flows for the following investment projects: (a) For Project A. find the value of X that makes the equivalent annual receiptsequal the equivalent annual disbursement at i = 13%.(b) Would you accept Project Bat i = 15% based on the AE criterion?
3) Consider the following two projects: Net Cash Flow Each Period Initial Outlay 1 2 3 4 Project A $4,000,000 $2,003,000 $2,003,000 $2,003,000 $2,003,000 Project B $4,000,000 0 0 0 $11,000,000 Calculate the net present value of each of the above projects, assuming a 14 percent discount rate. What is the internal rate of return for each of the above projects? Compare and explain the conflicting rankings of the NPVs and IRRs obtained in parts a and b above. If 14 percent is the required rate of return, and these projects are independent, what decision should be made? If 14 percent is the required rate of return, and the projects are mutually exclusive, what decision should be made?

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