Consider the case of another company. Kim Printing is evaluating two mutually exclusive projects. They both require a $1 million investment today and have expected NPVs of $200,000. Management conducted a full risk analysis of these two projects, and the results are shown below. Risk Measure Standard deviation of project's expected NPVS Project beta Correlation coefficient of project cash flows (relative to the firm's existing projects) Project A $80,000 1.2 0.7 Which of the following statements about these projects' risk is correct? Check all that apply. Project B has more stand-alone risk than Project A. Project A has more corporate risk than Project B. Project B has more corporate risk than Project A. Project A has more market risk than Project B. Project B $40,000 1.0 0.9

Consider the case of another company. Kim Printing is evaluating two mutually exclusive projects. They both require a $1 million investment today and have expected NPVs of $200,000. Management conducted a full risk analysis of these two projects, and the results are shown below. Risk Measure Standard deviation of project's expected NPVS Project beta Correlation coefficient of project cash flows (relative to the firm's existing projects) Project A $80,000 1.2 0.7 Which of the following statements about these projects' risk is correct? Check all that apply. Project B has more stand-alone risk than Project A. Project A has more corporate risk than Project B. Project B has more corporate risk than Project A. Project A has more market risk than Project B. Project B $40,000 1.0 0.9

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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RiverRocks, Inc., is considering a project with the following projected free cash flows: Year 1 3 4 Cash Flow -$50.3 $10.3 $19.3 $19.5 $14.1 (in millions) The firm believes that, given the risk of this project, the WACC method is the appropriate approach to valuing the project. RiverRocks' WACC is 11.8%. Should it take on this project? Why or why not? The timeline for the project's cash flows is: (Select the best choice below.) O A. Cash Flows (millions) - $50.3 $10.3 $19.3 $19.5 $14.1 Year 1 2 3 4 O B. Cash Flows (millions) -$50.3 $10.3 - $19.3 - $19.5 - $14.1 Year 1 3 4 O C. Cash Flows (millions) $50.3 $10.3 $19.3 - $19.5 - $14.1 Year 1 O D. Cash Flows (millions) $50.3 $10.3 $19.3 $19.5 $14. Year 1 2 3 4 The net present value of the project is S million. (Round to three decimal places.) RiverRocks take on this project because the NPV is (Select from the drop-down menus.)
Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown below. The required rate of return on projects of both of their risk class is 8 percent, and that the maximum allowable payback and discounted payback statistic for the projects are 2 and 3 years, respectively. Time Project A Cash Flow Project B Cash Flow Use the payback decision rule to evaluate these projects, which one(s) should it be accepted or rejected? Multiple Choice 0 -35,000 -45,000 1 25,000 25,000 2 45,000 5,000 3 16,000 65,000
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 11 percent, and that the maximum allowable payback and discounted payback statistics for your company are 3.0 and 3.5 years, respectively. Time: Cash flow: 0 1 2 -$241,000 $66,400 $84,600 Payback Use the payback decision rule to evaluate this project. Note: Round your answer to 2 decimal places. years 4 3 $141,600 $122,600 Should the project be accepted or rejected? (Click to select) 5 $81,800
USE EXCEL TO SHOW FORMULAS Elizabeth Corporation is starting two new projects. Project A requires an investment of $5,000, has expected return of 16% with standard deviation 14%. Project B has initial investment of $15,000, expected return of 15% with standard deviation 10%. The correlation coefficient between the projects is 0.75. 1- Find the expected return, in dollars, of the portfolio of these two projects. 2- What is the probability that this return is less than $4,000?
FB Company is considering investing in two construction projects, and he developed the following estimates of the cash flows. His required return is 10% and views these projects as equally risky. Year Project 1 cash flow project 2 cash flow 0 -550000 -700000 1 150000 200000 2 200000 150000 3 150000 250000 4 150000 150000 5 100000 150000 Required: a) Calculate the net present value (NPV) of each project, assess its acceptability, and indicate which project is best using NPV. b) Calculate the profitability index (PI) of each project, assess its acceptability, and indicate which project is best using PI. c) If both the projects have recorded a positive NPV value and the projects are mutually exclusive, which projects would you recommend for FB Company to undertake? Why?
The following are two projects a firm is considering: Project B Cash Flow Year 0 1 2 3 4 $2,939.01 Assuming that the relevant cost of capital for both projects is 11%, you should be able to determine the net present value (NPV) and the internal rate of return (IRR) for both project. Assume now that the firm has capital rationing, but knows that its true reinvestment rate is 20%, while its cost of capital is 11 percent. Given this information, determine the modified net present value (MNPV) for Project B. O $2.479.00 O $2.965.10 O$3.479.89 Project A Cash Flow O $4,084.05 ($10,000.00) ($11,000.00) $3,000.00 $5,000.00 $4,000.00 $4,000 00 $5,000.00 $4,000.00 $2,000.00 $2,000.00
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 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively. Time: 0 1 2 3 4 5 6 Cash flow: -$4,900 $1,260 $2,460 $1,660 $1,660 $ 1,460 $1,260 Use the NPV decision rule to evaluate this project. (Do not round intermediate calculations and round your final answer to 2 decimal places.) 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 statistics for your company are 2.5 and 3.0 years, respectively. Time: 0 1 2 3 4 5 Cash flow -$228,000 $65, 100 $83,300 $140, 300 $121,300 $80, 500 Use the discounted payback decision rule to evaluate this project. (Do not round intermediate…
Use the information below to answer Question#40: GIVEN: The XYZ Company is considering the following project with its corresponding financial data. The Company requires a 9% return from its investments. $ 500,000 $ 200,000 $ 225,000 $ 245,000 Initial investment: Expected Cash in-flow Year 1: Expected Cash in-flow Year 2: Expected Cash in-flow Year 3: Present Value Factor of 1 at 9%: n=1: 0.91743 n=2: 0.84168 n=3: 0.77218 40) Choose from one of the following that accurately depicts this decision: A) This investment should not be considered because NPV is a negative $62,048 B) This învestment should be considered because NPV equals positive $62,048 C) This investment should be considered because the IRR for this investment is obviously less than its Required Rate of Return D) B and Care both correct
Connor Corporation is considering two projects (see below). For your analysis, assume these projects are mutually exclusive with a required rate of return of 12%. project 1 project 2 initial investment $(510,000) $(685,000) cash flow year 1 485,000 610,000 Compute the following for each project: NPV (net present value) PI (profitability index) IRR (internal rate of return) Based on your analysis, answer the following questions : Which is the best choice? Why? Which project should be selected and why? If the projects had the same IRR amounts but different NPV totals, then how would you know which project to select? Explain.
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 7 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively. Time: Cash flow: 0 2 3 4 5 -$5,400 $1,600 $2,800 $2,000 $2,000 $1,800 Use the MIRR decision rule to evaluate this project. (Do not round intermediate calculations and round your final answer to 2 decimal places.) 6 $1,600
RiverRocks, Inc., is considering a project with the following projected free cash flows: Year 1 2 3 Cash Flow - $49.7 $10.2 $19.6 $19.6 $15.1 (in millions) The firm believes that, given the risk of this project, the WACC method is the appropriate approach to valuing the project. RiverRocks' WACC is 12.4%. Should it take on this project? Why or why not? The timeline for the project's cash flows is: (Select the best choice below.) O A. Cash Flows (millions) - $49.7 - $10.2 - $19.6 - $19.6 - $15.1 Year 1 2 3 4 O B. Cash Flows (millions) $49.7 $10.2 $19.6 $19.6 $15.1 Year 1 4 O C. Cash Flows (millions) - $49.7 $10.2 $19.6 $19.6 $15.1 Year 1 2 3 4 O D. Cash Flows (millions) $49.7 - $10.2 - $19.6 $19.6 - $15.1 Year 1 2 4 The net present value of the project is S million. (Round to three decimal places.) RiverRocks V take on this project because the NPV is (Select from the drop-down menus.)
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