Look at the cash flows for projects F and G given below. Cash Flows ($) NPV IRR at Project Ce C3 C4 F 0 G C1 C2 (11,500) 6,600 6,600 6,600 (11,500) 3,600 3,600 3,600 3,600 3,600 3,600 3,600 3,600 26.5 7,706 C5 C6 C7 Cg (%) 10% 0 0 0 0 33.0 4,913 The cost of capital was assumed to be 10%. Assume that the forecasted cash flows for projects of this type are overstated by 12% on average. That is, the forecast for each cash flow from each project should be reduced by 12%. But a lazy financial manager, unwilling to take the time to argue with the projects' sponsors, instructs them to use a discount rate of 22%. a. What are the projects' true NPVs? (Do not round intermediate calculations. Round your answers to nearest dollar amount.) Project F Project G NPV at 10% b. What are the NPVs at the 22% discount rate? (Do not round intermediate calculations. Round your answers to nearest dollar amount.) Project F Project G NPV at 22%

Corporate Fin Focused Approach
5th Edition
ISBN:9781285660516
Author:EHRHARDT
Publisher:EHRHARDT
Chapter10: The Basics Of Capital Budgeting: Evaluating Cash Flows
Section10.4: Internal Rate Of Return (irr)
Problem 2ST
Question

am. 111.

Look at the cash flows for projects F and G given below.
Cash Flows ($)
NPV
IRR
at
Project
Ce
C3
C4
F
0
G
C1 C2
(11,500) 6,600 6,600 6,600
(11,500) 3,600 3,600 3,600 3,600 3,600 3,600 3,600 3,600 26.5 7,706
C5
C6
C7
Cg
(%) 10%
0
0
0
0
33.0 4,913
The cost of capital was assumed to be 10%. Assume that the forecasted cash flows for projects of this type are overstated by 12% on
average. That is, the forecast for each cash flow from each project should be reduced by 12%. But a lazy financial manager, unwilling to
take the time to argue with the projects' sponsors, instructs them to use a discount rate of 22%.
a. What are the projects' true NPVs? (Do not round intermediate calculations. Round your answers to nearest dollar amount.)
Project F
Project G
NPV at 10%
b. What are the NPVs at the 22% discount rate? (Do not round intermediate calculations. Round your answers to nearest dollar
amount.)
Project F
Project G
NPV at 22%
Transcribed Image Text:Look at the cash flows for projects F and G given below. Cash Flows ($) NPV IRR at Project Ce C3 C4 F 0 G C1 C2 (11,500) 6,600 6,600 6,600 (11,500) 3,600 3,600 3,600 3,600 3,600 3,600 3,600 3,600 26.5 7,706 C5 C6 C7 Cg (%) 10% 0 0 0 0 33.0 4,913 The cost of capital was assumed to be 10%. Assume that the forecasted cash flows for projects of this type are overstated by 12% on average. That is, the forecast for each cash flow from each project should be reduced by 12%. But a lazy financial manager, unwilling to take the time to argue with the projects' sponsors, instructs them to use a discount rate of 22%. a. What are the projects' true NPVs? (Do not round intermediate calculations. Round your answers to nearest dollar amount.) Project F Project G NPV at 10% b. What are the NPVs at the 22% discount rate? (Do not round intermediate calculations. Round your answers to nearest dollar amount.) Project F Project G NPV at 22%
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