her- vide Problems 河 11-6 Discuss the following statement: If a firm has only indepent WACC, and projects with normal cash flows, the NPV and IRR methods to identical capital budgeting decisions. What does this imply about the choice IRR and NPV? If each of the assumptions were changed (one by one), how would answer change? you 11-7 Why might it be rational for a small firm that does not have access to the capital markets to 11-8 Project X is very risky and has an NPV of $3 million. Project Y is very safe and has an NPV of $2.5 million. They are mutually exclusive, and project risk has been properly considered use the payback method rather than the NPV method? 11-9 What reinvestment rate assumptions are built into the NPV, IRR, and MIRR methods? Give in the NPV analyses. Which project should be chosen? Explain. an explanation for your answer. 11-10 A firm has a $100 million capital budget. It is considering two projects, each costing $100 million. Project A has an IRR of 20% and an NPV of $9 million; it will be terminated after 1 year at a profit of $20 million, resulting in an immediate increase in EPS. Project B, which cannot be postponed, has an IRR of 30% and an NPV of $50 million. However, the firm's short-run EPS will be reduced if it accepts Project B because no revenues will be generated for several years. a. Should the short-run effects on EPS influence the choice between the two projects? b. How might situations like this influence a firm's decision to use payback? 11-1 NPV Project L requires an initial outlay at t = 0 of $65,000, its expected cash inflows are $12,000 per year for 9 years, and its WACC is 9%. What is the project's NPV? 11-2 IRR Refer to problem 11-1. What is the project's IRR? 11-3 MIRR Refer to problem 11-1. What is the project's MIRR? 11-4 PAYBACK PERIOD Refer to problem 11-1. What is the project's payback? 11-5 DISCOUNTED PAYBACK Refer to problem 11-1. What is the project's discounted payback? 11-6 NPV Your division is considering two projects with the following cash flows (in millions): 0 Project A Project B -$25 -$20 1 + $5 $10 2 + 3 $10 $9 $17 $6 mediate lems 43 a. What are the projects' NPVs assuming the WACC is 5%? 10%? 15%? b. What are the projects' IRRS at each of these WACCs? c. If the WACC was 5% and A and B were mutually exclusive, which project would you choose? What if the WACC was 10%? 15%? (Hint: The crossover rate is 7.81%.) this year's capital budget. After-tax cash flows are as follows: 11-7 CAPITAL BUDGETING CRITERIA A firm with a 14% WACC is evaluating two projects for 0 1 2 3 4 5 ト Project M -$30,000 $10,000 Project N -$90,000 $28,000 $10,000 $28,000 $10,000 $10,000 $28,000 $28,000 $10,000 $28,000 a. Calculate NPV, IRR, MIRR, payback, and discounted payback for each project. b. Assuming the projects are independent, which one(s) would you recommend?

her- vide Problems 河 11-6 Discuss the following statement: If a firm has only indepent WACC, and projects with normal cash flows, the NPV and IRR methods to identical capital budgeting decisions. What does this imply about the choice IRR and NPV? If each of the assumptions were changed (one by one), how would answer change? you 11-7 Why might it be rational for a small firm that does not have access to the capital markets to 11-8 Project X is very risky and has an NPV of $3 million. Project Y is very safe and has an NPV of $2.5 million. They are mutually exclusive, and project risk has been properly considered use the payback method rather than the NPV method? 11-9 What reinvestment rate assumptions are built into the NPV, IRR, and MIRR methods? Give in the NPV analyses. Which project should be chosen? Explain. an explanation for your answer. 11-10 A firm has a $100 million capital budget. It is considering two projects, each costing $100 million. Project A has an IRR of 20% and an NPV of $9 million; it will be terminated after 1 year at a profit of $20 million, resulting in an immediate increase in EPS. Project B, which cannot be postponed, has an IRR of 30% and an NPV of $50 million. However, the firm's short-run EPS will be reduced if it accepts Project B because no revenues will be generated for several years. a. Should the short-run effects on EPS influence the choice between the two projects? b. How might situations like this influence a firm's decision to use payback? 11-1 NPV Project L requires an initial outlay at t = 0 of $65,000, its expected cash inflows are $12,000 per year for 9 years, and its WACC is 9%. What is the project's NPV? 11-2 IRR Refer to problem 11-1. What is the project's IRR? 11-3 MIRR Refer to problem 11-1. What is the project's MIRR? 11-4 PAYBACK PERIOD Refer to problem 11-1. What is the project's payback? 11-5 DISCOUNTED PAYBACK Refer to problem 11-1. What is the project's discounted payback? 11-6 NPV Your division is considering two projects with the following cash flows (in millions): 0 Project A Project B -$25 -$20 1 + $5 $10 2 + 3 $10 $9 $17 $6 mediate lems 43 a. What are the projects' NPVs assuming the WACC is 5%? 10%? 15%? b. What are the projects' IRRS at each of these WACCs? c. If the WACC was 5% and A and B were mutually exclusive, which project would you choose? What if the WACC was 10%? 15%? (Hint: The crossover rate is 7.81%.) this year's capital budget. After-tax cash flows are as follows: 11-7 CAPITAL BUDGETING CRITERIA A firm with a 14% WACC is evaluating two projects for 0 1 2 3 4 5 ト Project M -$30,000 $10,000 Project N -$90,000 $28,000 $10,000 $28,000 $10,000 $10,000 $28,000 $28,000 $10,000 $28,000 a. Calculate NPV, IRR, MIRR, payback, and discounted payback for each project. b. Assuming the projects are independent, which one(s) would you recommend?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter13: Capital Budgeting: Estimating Cash Flows And Analyzing Risk

Section: Chapter Questions

Problem 13MC

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