Suppose Hungry Whale Electronics is evaluating a proposed capital budgeting project (project Alpha) that will require an initialinvestment of $400,000. The project is expected to generate the following net cash flows:YearCash FlowYear 1$325,000Year 2$475,000Year 3$475,000Year 4$450,000Hungry Whale Electronics's weighted average cost of capital is 9%, and project Alpha has the same risk as the firm's average project. Based on thecash flows, what is project Alpha's net present value (NPV)?$1,131,073$983,542$1,458,542$1,433,542 Hungry Whale Electronics's decision to accept or reject project Alpha is independent of its decisions on other projects. If the firm follows the NPVmethod, it shouldproject Alpha.Which of the following statements best explains what it means when a project has an NPV of $0?When a project has an NPV of $0, the project is earning a rate of return less than the project's weighted average cost of capital. It's OK toaccept the project, as long as the project's profit is positive.When a project has an NPV of $0, the project is earning a profit of $0. A firm should reject any project with an NPV of $0, because theproject is not profitable.O When a project has an NPV of $0, the project is earning a rate of return equal to the project's weighted average cost of capital. It's OK toaccept a project with an NPV of $0, because the project is earning the required minimum rate of return.

Net present value = Present value of cash flows - Initial investment

Suppose Hungry Whale Electronics is evaluating a proposed capital budgeting project (project Alpha) that will require an initial investment of $400,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $325,000 Year 2 $475,000 Year 3 $475,000 Year 4 $450,000 Hungry Whale Electronics's weighted average cost of capital is 9%, and project Alpha has the same risk as the firm's average project. Based on the cash flows, what is project Alpha's net present value (NPV)? O $1,131,073 O $983,542 O $1,458,542 O $1,433,542

Suppose Hungry Whale Electronics is evaluating a proposed capital budgeting project (project Alpha) that will require an initial investment of $400,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $325,000 Year 2 $475,000 Year 3 $475,000 Year 4 $450,000 Hungry Whale Electronics's weighted average cost of capital is 9%, and project Alpha has the same risk as the firm's average project. Based on the cash flows, what is project Alpha's net present value (NPV)? O $1,131,073 O $983,542 O $1,458,542 O $1,433,542

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

See similar textbooks

Similar questions

NPV and IRR Benson Designs has prepared the following estimates for a long-term project it is considering. The initial investment is $37,770, and the project will yield cash inflows of $5,000 per year for 12 years. The firm has a cost of capital of 15%. a. Determine the net present value (NPV) for the project. b. Determine the internal rate of return (IRR) for the project. c. Would you recommend that the firm accept or reject the project? a. The NPV of the project is $ (Round to the nearest cent)
You calculate your firm’s WACC is 11.5% and you are evaluating a project that will generate the following cash flows: year 1 = $20,000, year 2 = $30,000, and year 3 = $50,000. Calculate the NPV of the project if the cost of the project is $90,000.
A project has initial costs of $3,000 and subsequent cash inflows of $1350,275,875 and 1525 . The company's 10% cost of capital is an appropriate discount rate for this average risk project. Calculate the following: NPV IRR Profitability Index Please number/label each of your answers as shown above. Be sure to show your TVM function calculator inputs, and four decimal places.
The internal rate of return (IRR) refers to the compound annual rate of return that a project generates based on its up-front cost and subsequent cash flows. Consider this case: Blue Llama Mining Company is evaluating a proposed capital budgeting project (project Delta) that will require an initial investment of $1,400,000. Blue Llama Mining Company has been basing capital budgeting decisions on a project’s NPV; however, its new CFO wants to start using the IRR method for capital budgeting decisions. The CFO says that the IRR is a better method because percentages and returns are easier to understand and to compare to required returns. Blue Llama Mining Company’s WACC is 7%, and project Delta has the same risk as the firm’s average project. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $300,000 Year 2 $425,000 Year 3 $400,000 Year 4 $425,000 Q1. Which of the following is the correct calculation of project Delta’s…
Suppose Hungry Whale Electronics is evaluating a proposed capital budgeting project (project Alpha) that will require an initial investment of $450,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $350,000 Year 2 $450,000 Year 3 $400,000 Year 4 $475,000 Hungry Whale Electronics's weighted average cost of capital is 7%, and project Alpha has the same risk as the firm's average project. Based on the cash flows, what is project Alpha's net present value (NPV)? $959,045 $1,309,045 $1,409,045 $1,150,854
Consider this case: Suppose Green Caterpillar Garden Supplies Inc. is evaluating a proposed capital budgeting project (project Alpha) that will require an initial investment of $550,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $350,000 Year 2 450,000 Year 3 500,000 Year 4 400,000 Green Caterpillar Garden Supplies Inc.’s weighted average cost of capital is 9%, and project Alpha has the same risk as the firm’s average project. Based on the cash flows, what is project Alpha’s net present value (NPV)? (Note: Do not round your intermediate calculations.) $1,219,319 $1,269,319 $1,319,319 $819,319
A project that costs $1000 today is expected to have cash flows of $200/year for 10 years. Under these projections, this is a positive NPV project: if your cost of capital is 10%/year, investing $1000 today and earning $200 per year for 10 years yields an NPV of $228.91 (you can verify this yourself, or take my word for it). However, those annual cash flows of $200 are based on the following expectations: A 50% probability that business will be good and the project will earn $300/year, and a 50% probability that business will be bad and the project will earn $100/year. (Note that the expected annual cash flows will be: [0.5 * $300] + [0.5 * $100] = $200/year, as stated above.) Unfortunately, you will not know which state of the world you will be in until you spend the $1000 and start the business; in year 1, after the business opens, you will find out. Obviously, if you open for business and business is good, you will want to stay open for the entire 10 years; if your cost of capital…
Let's assume that you are working on an independent capital budgeting project which is expected to have the following cash flows: Year Cash Flows 0 -$850,000 1 $300,000 2 $400,000 3 $500,000 What is the project’s net present value (NPV) at an 18% required rate of return? (Round to the nearest whole number.) Will you accept or reject this project?
What information does the payback period provide? Suppose you are evaluating a project with the expected future cash inflows shown in the following table. Your boss has asked you to calculate the project's net present value (NPV). You don't know the project's initial cost, but you do know the project's regular, or conventional, payback period is 2.50 years. If the project's weighted average cost of capital (WACC) is 9%, the project's NPV (rounded to the nearest dollar) is: $355,048 $287,420 $405,769 $338,141 Which of the following statements indicate a disadvantage of using the regular payback period (not the discounted payback period) for capital budgeting decisions? Check all that apply. The payback period does not take the time value of money into account. The payback period is calculated using net income instead of cash flows. The payback period does not take the project's entire life into account.
Several companies, including Barnyard and Energy Solutions Corporation, are considering project A, which is believed by all to have a level of risk that is equal to that of the average-risk project at Barnyard. Project A is a project that would require an initial investment of $78,000 and then produce an expected cash flow of $101,300 in 4 years. Project A has an internal rate of return of 7.65 percent. The weighted-average cost of capital for Barnyard is 10.92 percent and the weighted-average cost of capital for Energy Solutions Corporation is 5.21 percent. What is the NPV that Energy Solutions Corporation would compute for project A? $-2568.40 (plus or minus $10) $144922.17 (plus or minus $10) $-11077.83 (plus or minus $10) $4676.36 (plus or minus $10) None of the above is within $10 of the correct answer
You are analyzing a capital budgeting project. The project is expected to have a PV of cash inflows of $310 million and will cost $250 million (in present value dollars) to take on. You have done a simulation of the project cashflows and the simulation yields a variance in present value of cash inflows of 0.04. You have the rights to this project for the next 10 years, during which period you have to pay $11 million a year to retain the project rights. The 10-year treasury bond rate is 4.5% . a. What is the value of the project as an option? The value is $Answer 1 Question 3. (Round your answer to two decimals. Omit the '$' sign in your response.) b. What is the difference in the project's value from option pricing and traditional NPV?
Grey Fox Aviation Company is analyzing a project that requires an initial investment of $450,000. The project’s expected cash flows are: Year Cash Flow Year 1 $300,000 Year 2 –175,000 Year 3 475,000 Year 4 450,000 Grey Fox Aviation Company’s WACC is 10%, and the project has the same risk as the firm’s average project. Calculate this project’s modified internal rate of return (MIRR): 26.73% 27.89% 20.92% 23.24% If Grey Fox Aviation Company’s managers select projects based on the MIRR criterion, they should this independent project. Which of the following statements best describes the difference between the IRR method and the MIRR method? The IRR method uses only cash inflows to calculate the IRR. The MIRR method uses both cash inflows and cash outflows to calculate the MIRR. The IRR method assumes that cash flows are reinvested at a rate of return equal to the IRR. The MIRR method assumes that cash flows…

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS