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

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The following are two projects a firm is considering: Project B Cash Flow Year 0 1 2 3 4 $2,939.01 Assuming that the relevant cost of capital for both projects is 11%, you should be able to determine the net present value (NPV) and the internal rate of return (IRR) for both project. Assume now that the firm has capital rationing, but knows that its true reinvestment rate is 20%, while its cost of capital is 11 percent. Given this information, determine the modified net present value (MNPV) for Project B. O $2.479.00 O $2.965.10 O$3.479.89 Project A Cash Flow O $4,084.05 ($10,000.00) ($11,000.00) $3,000.00 $5,000.00 $4,000.00 $4,000 00 $5,000.00 $4,000.00 $2,000.00 $2,000.00
The capital budgeting director of J. Sparrow Corporation is evaluating a project that costs $429,000, is expected to last for 5 years, and produces after-tax cash flows equal to $94,000 per year. If the firm's required rate of return is 12.5 percent and its tax rate is 40 percent, what is the project's internal rate of return (IRR)? Should it be considered? 12.5%. Yes the project is good! O 12%. Yes, the project should be considered. O 14%. No project should not be considered 12%. No, the project should not be considered.
Consider a project with free cash flows in one year of $90,000 in a weak economy or $117,000 in a strong economy, with each outcome being equally likely. The initial investment required for the project is $80,000, and the project's cost of capital is 15%. The risk-free interest rate is 5%. Suppose that you borrow $30,000 in financing the project. According to MM proposition II, the firm's equity cost of capital will be closest to: A. 15% B. 25% C. 17% D. 20%
The net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions. Consider this case: Suppose Black Sheep Broadcasting Company is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $2,500,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $325,000 Year 2 $500,000 Year 3 $475,000 Year 4 $425,000 Black Sheep Broadcasting Company’s weighted average cost of capital is 9%, and project Beta has the same risk as the firm’s average project. Based on the cash flows, what is project Beta’s NPV? -$638,127 -$788,127 -$1,113,127 $1,386,873 Please solve using excel
solve these 2 pratice problems
Company XYZ is considering an investment project that is expected to generate the following cash flows: Year 1: $500,000 Year 2: $700,000 Year 3: $800,000 Year 4: $900,000 Year 5: $1,200,000 The cost of capital for the company is 10%. Calculate the Firm's Present Value (FPV) of the cash flows. To calculate the Firm's Present Value (FPV) of the cash flows, you need to discount each cash flow to its present value using the cost of capital, and then sum up the present values of all cash flows.
Consider a project with free cash flows in one year of $90 000 in a weak economy or $117 000 in a strong economy, with each outcome being equally likely. The initial investment required for the project is $40 000, and the project's cost of capital is 15.9%. The risk-free interest rate is 5%. Suppose that to raise the funds for the initial investment the firm borrows $20 000 at the risk-free rate and issues new equity to cover the remainder. In this situation, the value of the firm's levered equity from the project is closest to: a. $49301 b. $89301 c. $83500 d. $69301 Suppose an investment is equally likely to have a 37.9% return or a -20% return. The total volatility of returns is closest to: O a. 28.95% b. 8.38% c. 20.47% d. 40.94% Clear my choice
Your company wants to determine the feasibility of two capital budgeting projects, and has given you the task of analyzing them. Because the projects are at the early "idea" stage, they are referred to simply as Project A and Project B. Each project has a cost of $50.000. and a cost of capital of 12%. Their expected net cash flows are: Expected Net Cash Flows Year Project A (S) Project B (S) (50.000) (50.000) 26,500 18,500 18.000 17.500 3. 12,000 15,500 4 7.000 15,500 (a) Calculate each project's payback period, (b) Calculate each project's net present value (NPV) (c) Calculate each project's internal rate of return (IRR). (d) Which project(s) should be accepted if they are independent? (e) Which project should be accepted if they are mutually exclusive?
The management of NUBD Co. is considering three investment projects-W, X, and Y. Project W would require an investment of P21,000, Project X of P66,000, and Project Y of P95,000. The present value of the cash inflows would be P22,470 for Project W, P73,920 for Project X, and P98,800 for Project Y. Rank the projects according to the profitability index, from most profitable to least profitable. *
Suppose Black Sheep Broadcasting Company 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 $350,000 Year 2 $475,000 Year 3 $400,000 Year 4 $400,000 Black Sheep Broadcasting Company’s weighted average cost of capital is 10%, 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)? $884,475 $484,475 $1,061,370 $1,017,146 Black Sheep Broadcasting Company’s decision to accept or reject project Alpha is independent of its decisions on other projects. If the firm follows the NPV method, it should ___________ project Alpha. reject accept
Suppose you are running a capital budgeting analysis on a project with an estimated cost of $3 million. The project is considered similar to the existing lines of businesses for the company. Given the cash situation, the company will fund the project completely with a new debt of $3 million. This new debt will be issued at 8% interest for 10 years. The company has an estimated 11% WACC. When conducting the capital analysis on this project, what should be your discount rate (cost of capital) for the project? Explain your answer briefly.
Consider the following project data. A marketing study that costs $200 will be conducted at t = 0. The best estimate now is that there is a 70 percent chance that the study will indicate potential and a 30 percent chance that it will not. If the study indicates potential, the firm will spend $500 at t = 1 to start production. If the firm starts production, the firm is confident that cash inflows will be $1,000 annually for two years (t=2 and 3). If the appropriate cost of capital is 10 percent, what is the project's expected NPV to the nearest dollar? A) $1,300 B) $923 C) $646 D) $586 E) $446

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