Lasik Vision Inc. recently analyzed the project whose cash flows are shown below. However, before Lasik decided to accept or reject the project, the Federal Reserve took actions that changed interest rates and therefore the firm's WACC. The Fed's action did not affect the forecasted cash flows. By how much did the change in the WACC affect the project's forecasted NPV? Note that a project's projected NPV can be negative, in which case it should be rejected. Old WACC: 8.00% New WACC: 9.75% Year 3 Cash flows -$1,000 $410 $410 $410 O a. -$32.50 O b. -$30.55 O c. -$28.60 O d. -$29.25 O e. -$34.12

Lasik Vision Inc. recently analyzed the project whose cash flows are shown below. However, before Lasik decided to accept or reject the project, the Federal Reserve took actions that changed interest rates and therefore the firm's WACC. The Fed's action did not affect the forecasted cash flows. By how much did the change in the WACC affect the project's forecasted NPV? Note that a project's projected NPV can be negative, in which case it should be rejected. Old WACC: 8.00% New WACC: 9.75% Year 3 Cash flows -$1,000 $410 $410 $410 O a. -$32.50 O b. -$30.55 O c. -$28.60 O d. -$29.25 O e. -$34.12

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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Moerdyk & Co. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher IRR, how much value will be forgone? Note that under certain conditions choosing projects on the basis of the IRR will not cause any value to be lost because the one with the higher IRR will also have the higher NPV, i.e., no conflict will exist. WACC: CFS CFL O a. $59.20 O b. $62.75 O c. $51.51 O d. $65.71 O e. $53.28 6.75% 0 -$1,025 -$1,025 1 $650 $100 2 $450 $300 3 $250 $500 4 $50 $700
Yonan Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the shorter payback, some value may be forgone. How much value will be lost in this instance? Note that under some conditions choosing projects on the basis of the shorter payback will not cause value to be lost. WACC: 14.25% 0 1 2 3 4 CFS -$950 $500 $800 $0 $0 CFL -$2,100 $400 $800 $800 $1,000 G $93.62 $95.90 $127.87 $0.00 $116.46
Dupont Chemicals is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO believes the IRR is the best selection criterion, while the CFO advocates the NPV. If the decision is made by choosing the project with the higher IRR rather than the one with the higher NPV, how much, if any, the value will be forgone, L.e, what's the chosen NPV versus the maximum possible NPVn Note that (1) "true value" is measured by NPV, and (2) under some conditions the choice of IRR vs. NPV will have no effect on the value gained or lost. WACC: 7,50% Year 4 CFS -$1,500 $550 $600 $100 $200 CFL $3,000 $650 $725 $800 $1.600
Ehrmann Data Systems is considering a project that has the following cash flow and WACC data. What is the project's MIRR? Note that a project's projected MIRR can be less than the WACC (and even negative), in which case it will be rejected. WACC: Year Cash flows a. 18.63% Ob. 10.52% c. 21.39% O d. 15.95% O e. 11.67% 14.75% 0 -$1,000 1 $450 2 $450 3 $450
Which of the following statements is false? The NPV and IRR always provide the same accept/reject recommendation for a project with conventional cash flows. IRR provides information in a form that is useful to managers. IRR does not consider the scale of the project. O The IRR is only appropriate when you have unconventional cash flows. It is possible to compute multiple IRRS for a single project.
20)
The payback method helps firms establish and identify a maximum acceptable payback period that helps in their capital budgeting decisions. Consider the case of Blue Hamster Manufacturing Inc.: Blue Hamster Manufacturing Inc. is a small firm, and several of its managers are worried about how soon the firm will be able to recover its initial investment from Project Sigma’s expected future cash flows. To answer this question, Blue Hamster’s CFO has asked that you compute the project’s payback period using the following expected net cash flows and assuming that the cash flows are received evenly throughout each year. Complete the following table and compute the project’s conventional payback period. For full credit, complete the entire table. (Note: Round the conventional payback period to two decimal places. If your answer is negative, be sure to use a minus sign in your answer.) Year 0 Year 1 Year 2 Year 3 Expected cash flow -$6,000,000 $2,400,000 $5,100,000…
Total project value ($) Debt Option Loan-to-value Rate (%) Interest only period (years) Amortization (years) $35,000,000.00 A 65% 3.25% 3 20 B 70% 3.25% 3 30 C 70% 3.00% 0 30 D 50% 4.25% 0 30
The payback method helps firms establish and identify a maximum acceptable payback period that helps in their capital budgeting decisions. Consider the case of Cold Goose Metal Works Inc.: Cold Goose Metal Works Inc. is a small firm, and several of its managers are worried about how soon the firm will be able to recover its initial investment from Project Beta’s expected future cash flows. To answer this question, Cold Goose’s CFO has asked that you compute the project’s payback period using the following expected net cash flows and assuming that the cash flows are received evenly throughout each year. Complete the following table and compute the project’s conventional payback period. For full credit, complete the entire table. (Note: Round the conventional payback period to the nearest two decimal places. If your answer is negative use a minus sign.) Year 0 Year 1 Year 2 Year 3 Expected cash flow -$4,500,000 $1,800,000 $3,825,000 $1,575,000 Cumulative…
An analysis of a proposal by the net present value method indicated that the present value of future cash inflows exceeded the amount to be invested. Which of the following statements best describes the results of this analysis? A)The proposal is undesirable, and the rate of return expected from the proposal is less than the minimum rate used for the analysis. B)The proposal is desirable, and the rate of return expected from the proposal exceeds the minimum rate used for the analysis. C)The proposal is undesirable, and the rate of return expected from the proposal exceeds the minimum rate used for the analysis. D)The proposal is desirable, and the rate of return expected from the proposal is less than the minimum rate used for the analysis.
When the present value of the cash inflows exceeds the initial cost of a project, then the project should be : A. rejected because NPV is negative. B. accepted because NPV is greater than 1. C. accepted because the profitability index is negative. D. rejected because the internal rate of return is negative.
Last month, Company Z analyzed a project whose cash flows are shown below. However, before the decision to accept or reject the project, the Federal Reserve took actions that changed interest rates (and, therefore, the firm's WACC). The Fed's actions did not affect the forecasted cash flows. By how much did the change in the WACC affect the project's forecasted NPV? Old WACC 10.00% New WACC 7.00% Year 0 1 2 3 Cash Flow -1,100 600 600 600 Group of answer choices 115.47 65.98 103.10 0 (no change in NPV) 82.48

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