9. Problem 12.17 (Equivalent Annual Annuity)eBookA firm has two mutually exclusive investment projects to evaluate. The projects have the following cash flows:TimeAfter-tax Cash Flow XAfter-tax Cash Flow Y-$90,000-$80,00040,00035,00050,00035,00070,00035,00035,0000125,000Projects X and Y are equally risky and may be repeated indefinitely. If the firm's WACC is 12%, what is the EAA of the project that adds the most value to the firm? Do not roundintermediate calculations. Round your answer to the nearest dollar.Choose Projects, whose EAA- $

eBook A firm has two mutually exclusive investment projects to evaluate. The projects have the following cash flows: TimeAfter-tax Cash Flow XAfter-tax Cash Flow Y -$90,000 -$80,000 40,000 35,000 50,000 70,000 0 1 2 3 35,000 35,000 35,000 5,000 Projects X and Y are equally risky and may be repeated indefinitely. If the firm's WACC is 12%, what is the EAA of the project that adds the most value to the firm? Do not round intermediate calculations. Round your answer to the nearest dollar. Choose Project, whose EAA- $

eBook A firm has two mutually exclusive investment projects to evaluate. The projects have the following cash flows: TimeAfter-tax Cash Flow XAfter-tax Cash Flow Y -$90,000 -$80,000 40,000 35,000 50,000 70,000 0 1 2 3 35,000 35,000 35,000 5,000 Projects X and Y are equally risky and may be repeated indefinitely. If the firm's WACC is 12%, what is the EAA of the project that adds the most value to the firm? Do not round intermediate calculations. Round your answer to the nearest dollar. Choose Project, whose EAA- $

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 7P

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7. Unequal project lives Newtown Corp. has to choose between two mutually exclusive projects. If it chooses project A, Newtown Corp. will have the opportunity to make a similar investment in three years. However, if it chooses project B, it will not have the opportunity to make a second investment. The following table lists the cash flows for these projects. If the firm uses the replacement chain (common life) approach, what will be the difference between the net present value (NPV) of project A and project B, assuming that both projects have a weighted average cost of capital of 14%? Project A Year 0: Year 1: Year 2: Year 3: $11,416 $10,601 $13,863 Cash Flow -$15,000 9,000 15,000 14,000 Project B Year 0: Year 1: Year 2: Year 3: Year 4: Year 5: Year 6: - $40,000 8,000 15,000 14,000 13,000 12,000 11,000
7. Unequal project lives Allied Biscuit Co. has to choose between two mutually exclusive projects. If it chooses project A, Allied Biscuit Co. will have the opportunity to make a similar investment in three years. However, if it chooses project B, it will not have the opportunity to make a second investment. The following table lists the cash flows for these projects. If the firm uses the replacement chain (common life) approach, what will be the difference between the net present value (NPV) of project A and project B, assuming that both projects have a weighted average cost of capital of 14%? Cash Flow Project A Project B Year 0: –$12,500 Year 0: –$45,000 Year 1: 8,000 Year 1: 9,000 Year 2: 14,000 Year 2: 16,000 Year 3: 13,000 Year 3: 15,000 Year 4: 14,000 Year 5: 13,000 Year 6: 12,000 $17,719 $11,517 $12,403 $15,061 $10,631 Allied Biscuit Co. is considering a four-year project…
4. Unequal project lives ABC Telecom has to choose between two mutually exclusive projects. If it chooses project A, ABC Telecom will have the opportunity to make a similar investment in three years. However, if it chooses project B, it will not have the opportunity to make a second investment. The following table lists the cash flows for these projects. If the firm uses the replacement chain (common life) approach, what will be the difference between the net present value (NPV) of project A and project B, assuming that both projects have a weighted average cost of capital of 12%? Cash Flow Project A Year 0: -$17,500 Year 0: $45,000 Year 1: 10,000 Year 1: 9,000 Year 2: 16,000 Year 2: 16,000 Year 3: 15,000 Year 3: 15,000 Year 4: 14,000 Year 5: 13,000 Year 6: 12,000 • $14,124 $14,955 $18,279 ● $16,617 • $13,294 ABC Telecom is considering a three-year project that has a weighted average cost of capital of 10% and a NPV of $45,681. ABC Telecom can replicate this project indefinitely. What…
Consider two mutually exclusive projects with the following expected cash flows : Cash Flows Year Project C Project D 0 -15,000 -21,000 1 6,000 6,000 2 12,000 16,000 3 8,000 14,000 Whichever project you choose, if any, you require a return of 12% on your investment. a. If you apply the discounted payback criterion, which project will you choose? Why? b. If you apply the NPV criterion, which project will you choose? Why? c. Based on your answers in (a) and (b), which project will you finally choose? Why ? (i.e clearly explain the strengths and the weaknesses of each method therefore the reason(s) for choosing the project based on the chosen method)
2. You are considering two mutually exclusive projects with the following cash flows. The discount rate is 7.5 percent: YEAR PROJECT N PROJECT Y - P21,000,000 - P21,000,000 1 7,200,000 8,500,000 (a) Calculate the payback period of each project. ( (b) Compute the net present value of the two projects. (c) Which project should be accepted? Justify your answer. 2 4,900,000 5,200,000 9,100,000 4,900,000 4 6,100,000 8,700,000
B. Problem: A company is considering two projects. The discount rate is 10 percent, and the projects' cash flows would be: Years 1 3 Project A -S700 S500 $300 S100 Project B -S700 s100 S300 S600 a. Calculate the projects' NPVS and IRRS. b. If the two projects are independent, which project(s) should be chosen? c. If the two projects are mutually exchusive, which project should be chosen?
Central Energy is considering two mutually exclusive projects, Project Red and Project The projects have the following cash flows: Project Red Project White Year Cash Flows Cash Flows -$1,000 -$1,000 1 100 700 200 400 600 200 800 100 Assume that both projects have a 10 percent WACC. What is the internal rate of return (IRR) of the project that has the highest NPV? O14.30% O 21.83% 10.00% O18.24% O 21.96% 2.
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2. An investment has an installed cost of $412,670. The cash flows over the four-year life of the investment are projected to be $212,817, $153,408, $102,389, and $72,308. If the discount rate is zero, what is the NPV? If the discount rate is infinite, what is the NPV? At what discount rate is the NPV just equal to zero? Sketch the NPV profile for this investment based on these three points.
Q.9.
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?
CVD Ltd needs to choose from three mutually exclusive projects. The net cash flows from the projects will depend on market demand. All of the projects will last for only one year. The forecast net cash flows and their associated probabilities are given below:Market Demand Probability Weak 0.20 Average 0.50 Good 0.30 Market Demand Project A Project B Project C Weak R450 000 R350 000 R550 000 Average R550 000 R400 000 R500 000 Good R650 000 R450 000 R700 000 Required:Calculate the expected value of the net cash flows from each of the three projects.