The cost of capital of the project. Introduction: The difference between the present value of cash inflows and the present value of cash outflows over a period of time is known as the Net Present value .

Question

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Answer 1

Question

Chapter 10, Problem 1OR

a)

Summary Introduction

To determine: The cost of capital of the project.

Introduction:

The difference between the present value of cash inflows and the present value of cash outflows over a period of time is known as the Net Present value.

a)

Expert Solution

Explanation of Solution

Given information:

The initial investment for the project is $83,600,000 and it creates an annual cash inflow of $18,800,000 for 12 years. The project NPV is $66,000,000 and the IRR is 20%.

It is given that the IRR must be less than 20%. However, it is given as 20%. Thus, the NPV will become zero.

Hence, Company S should discount the cash flows at less than 20%, as the NPV is positive.

b)

Summary Introduction

To determine: The cost of capital of the firm.

Introduction:

The difference between the present value of cash inflows and the present value of cash outflows for a particular period is known as the Net Present value. Cost of capital is the cost of long term financing of the firm.

b)

Expert Solution

Explanation of Solution

Given information:

The initial investment for the project is $83,600,000 and it generates an annual cash inflow of $18,800,000 for 12 years. The project NPV is $66,000,000 and the IRR is 20%.

Explanation:

When the initial investment I₀, annual cash flow (AC), rate of interest r, and the time period n is given NPV can be calculated using the below equation:

NPV=AC((1+r)n−1)r(1+r)n−I0

By trial and error method let us assume the cost of capital to be 0.07.

NPV=18,800,000(((1+0.07)12−1)0.07(1+0.07)12)−83,600,000=(18,800,000×7.942686)−83,600,000=149,322,502.4−83,600,000=65,722,502.38

When substituting 11%, NPV is $65,722,502.38. The NPV is nearly equal to the given NPV $66,000,000. Thus, cost of capital of the firm is 7% (approximately).

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Answer 2

Question

Chapter 10, Problem 1OR

a)

Summary Introduction

To determine: The cost of capital of the project.

Introduction:

The difference between the present value of cash inflows and the present value of cash outflows over a period of time is known as the Net Present value.

a)

Expert Solution

Explanation of Solution

Given information:

The initial investment for the project is $83,600,000 and it creates an annual cash inflow of $18,800,000 for 12 years. The project NPV is $66,000,000 and the IRR is 20%.

It is given that the IRR must be less than 20%. However, it is given as 20%. Thus, the NPV will become zero.

Hence, Company S should discount the cash flows at less than 20%, as the NPV is positive.

b)

Summary Introduction

To determine: The cost of capital of the firm.

Introduction:

The difference between the present value of cash inflows and the present value of cash outflows for a particular period is known as the Net Present value. Cost of capital is the cost of long term financing of the firm.

b)

Expert Solution

Explanation of Solution

Given information:

The initial investment for the project is $83,600,000 and it generates an annual cash inflow of $18,800,000 for 12 years. The project NPV is $66,000,000 and the IRR is 20%.

Explanation:

When the initial investment I₀, annual cash flow (AC), rate of interest r, and the time period n is given NPV can be calculated using the below equation:

NPV=AC((1+r)n−1)r(1+r)n−I0

By trial and error method let us assume the cost of capital to be 0.07.

NPV=18,800,000(((1+0.07)12−1)0.07(1+0.07)12)−83,600,000=(18,800,000×7.942686)−83,600,000=149,322,502.4−83,600,000=65,722,502.38

When substituting 11%, NPV is $65,722,502.38. The NPV is nearly equal to the given NPV $66,000,000. Thus, cost of capital of the firm is 7% (approximately).

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Answer 3

Question

Chapter 10, Problem 1OR

a)

Summary Introduction

To determine: The cost of capital of the project.

Introduction:

The difference between the present value of cash inflows and the present value of cash outflows over a period of time is known as the Net Present value.

a)

Expert Solution

Explanation of Solution

Given information:

The initial investment for the project is $83,600,000 and it creates an annual cash inflow of $18,800,000 for 12 years. The project NPV is $66,000,000 and the IRR is 20%.

It is given that the IRR must be less than 20%. However, it is given as 20%. Thus, the NPV will become zero.

Hence, Company S should discount the cash flows at less than 20%, as the NPV is positive.

b)

Summary Introduction

To determine: The cost of capital of the firm.

Introduction:

The difference between the present value of cash inflows and the present value of cash outflows for a particular period is known as the Net Present value. Cost of capital is the cost of long term financing of the firm.

b)

Expert Solution

Explanation of Solution

Given information:

The initial investment for the project is $83,600,000 and it generates an annual cash inflow of $18,800,000 for 12 years. The project NPV is $66,000,000 and the IRR is 20%.

Explanation:

When the initial investment I₀, annual cash flow (AC), rate of interest r, and the time period n is given NPV can be calculated using the below equation:

NPV=AC((1+r)n−1)r(1+r)n−I0

By trial and error method let us assume the cost of capital to be 0.07.

NPV=18,800,000(((1+0.07)12−1)0.07(1+0.07)12)−83,600,000=(18,800,000×7.942686)−83,600,000=149,322,502.4−83,600,000=65,722,502.38

When substituting 11%, NPV is $65,722,502.38. The NPV is nearly equal to the given NPV $66,000,000. Thus, cost of capital of the firm is 7% (approximately).

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Answer 4

Question

Chapter 10, Problem 1OR

a)

Summary Introduction

To determine: The cost of capital of the project.

Introduction:

The difference between the present value of cash inflows and the present value of cash outflows over a period of time is known as the Net Present value.

a)

Expert Solution

Explanation of Solution

Given information:

The initial investment for the project is $83,600,000 and it creates an annual cash inflow of $18,800,000 for 12 years. The project NPV is $66,000,000 and the IRR is 20%.

It is given that the IRR must be less than 20%. However, it is given as 20%. Thus, the NPV will become zero.

Hence, Company S should discount the cash flows at less than 20%, as the NPV is positive.

b)

Summary Introduction

To determine: The cost of capital of the firm.

Introduction:

The difference between the present value of cash inflows and the present value of cash outflows for a particular period is known as the Net Present value. Cost of capital is the cost of long term financing of the firm.

b)

Expert Solution

Explanation of Solution

Given information:

The initial investment for the project is $83,600,000 and it generates an annual cash inflow of $18,800,000 for 12 years. The project NPV is $66,000,000 and the IRR is 20%.

Explanation:

When the initial investment I₀, annual cash flow (AC), rate of interest r, and the time period n is given NPV can be calculated using the below equation:

NPV=AC((1+r)n−1)r(1+r)n−I0

By trial and error method let us assume the cost of capital to be 0.07.

NPV=18,800,000(((1+0.07)12−1)0.07(1+0.07)12)−83,600,000=(18,800,000×7.942686)−83,600,000=149,322,502.4−83,600,000=65,722,502.38

When substituting 11%, NPV is $65,722,502.38. The NPV is nearly equal to the given NPV $66,000,000. Thus, cost of capital of the firm is 7% (approximately).

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Answer 5

Chapter 10, Problem 1OR

a)

Summary Introduction

To determine: The cost of capital of the project.

Introduction:

The difference between the present value of cash inflows and the present value of cash outflows over a period of time is known as the Net Present value.

a)

Expert Solution

Explanation of Solution

Given information:

The initial investment for the project is $83,600,000 and it creates an annual cash inflow of $18,800,000 for 12 years. The project NPV is $66,000,000 and the IRR is 20%.

It is given that the IRR must be less than 20%. However, it is given as 20%. Thus, the NPV will become zero.

Hence, Company S should discount the cash flows at less than 20%, as the NPV is positive.

b)

Summary Introduction

To determine: The cost of capital of the firm.

Introduction:

The difference between the present value of cash inflows and the present value of cash outflows for a particular period is known as the Net Present value. Cost of capital is the cost of long term financing of the firm.

b)

Expert Solution

Explanation of Solution

Given information:

The initial investment for the project is $83,600,000 and it generates an annual cash inflow of $18,800,000 for 12 years. The project NPV is $66,000,000 and the IRR is 20%.

Explanation:

When the initial investment I₀, annual cash flow (AC), rate of interest r, and the time period n is given NPV can be calculated using the below equation:

NPV=AC((1+r)n−1)r(1+r)n−I0

By trial and error method let us assume the cost of capital to be 0.07.

NPV=18,800,000(((1+0.07)12−1)0.07(1+0.07)12)−83,600,000=(18,800,000×7.942686)−83,600,000=149,322,502.4−83,600,000=65,722,502.38

When substituting 11%, NPV is $65,722,502.38. The NPV is nearly equal to the given NPV $66,000,000. Thus, cost of capital of the firm is 7% (approximately).

Answer 6

Chapter 10, Problem 1OR

a)

Summary Introduction

To determine: The cost of capital of the project.

Introduction:

The difference between the present value of cash inflows and the present value of cash outflows over a period of time is known as the Net Present value.

a)

Expert Solution

Explanation of Solution

Given information:

The initial investment for the project is $83,600,000 and it creates an annual cash inflow of $18,800,000 for 12 years. The project NPV is $66,000,000 and the IRR is 20%.

It is given that the IRR must be less than 20%. However, it is given as 20%. Thus, the NPV will become zero.

Hence, Company S should discount the cash flows at less than 20%, as the NPV is positive.

Answer 7

Chapter 10, Problem 1OR

a)

Summary Introduction

To determine: The cost of capital of the project.

Introduction:

The difference between the present value of cash inflows and the present value of cash outflows over a period of time is known as the Net Present value.

Answer 8

a)

Expert Solution

Explanation of Solution

Given information:

The initial investment for the project is $83,600,000 and it creates an annual cash inflow of $18,800,000 for 12 years. The project NPV is $66,000,000 and the IRR is 20%.

It is given that the IRR must be less than 20%. However, it is given as 20%. Thus, the NPV will become zero.

Hence, Company S should discount the cash flows at less than 20%, as the NPV is positive.

Answer 9

a)

Expert Solution

Answer 10

a)

Expert Solution

Answer 11

Expert Solution

Answer 12

b)

Summary Introduction

To determine: The cost of capital of the firm.

Introduction:

The difference between the present value of cash inflows and the present value of cash outflows for a particular period is known as the Net Present value. Cost of capital is the cost of long term financing of the firm.

b)

Expert Solution

Explanation of Solution

Given information:

The initial investment for the project is $83,600,000 and it generates an annual cash inflow of $18,800,000 for 12 years. The project NPV is $66,000,000 and the IRR is 20%.

Explanation:

When the initial investment I₀, annual cash flow (AC), rate of interest r, and the time period n is given NPV can be calculated using the below equation:

NPV=AC((1+r)n−1)r(1+r)n−I0

By trial and error method let us assume the cost of capital to be 0.07.

NPV=18,800,000(((1+0.07)12−1)0.07(1+0.07)12)−83,600,000=(18,800,000×7.942686)−83,600,000=149,322,502.4−83,600,000=65,722,502.38

When substituting 11%, NPV is $65,722,502.38. The NPV is nearly equal to the given NPV $66,000,000. Thus, cost of capital of the firm is 7% (approximately).

Answer 13

b)

Summary Introduction

To determine: The cost of capital of the firm.

Introduction:

The difference between the present value of cash inflows and the present value of cash outflows for a particular period is known as the Net Present value. Cost of capital is the cost of long term financing of the firm.

Answer 14

b)

Expert Solution

Explanation of Solution

Given information:

The initial investment for the project is $83,600,000 and it generates an annual cash inflow of $18,800,000 for 12 years. The project NPV is $66,000,000 and the IRR is 20%.

Explanation:

When the initial investment I₀, annual cash flow (AC), rate of interest r, and the time period n is given NPV can be calculated using the below equation:

NPV=AC((1+r)n−1)r(1+r)n−I0

By trial and error method let us assume the cost of capital to be 0.07.

NPV=18,800,000(((1+0.07)12−1)0.07(1+0.07)12)−83,600,000=(18,800,000×7.942686)−83,600,000=149,322,502.4−83,600,000=65,722,502.38

When substituting 11%, NPV is $65,722,502.38. The NPV is nearly equal to the given NPV $66,000,000. Thus, cost of capital of the firm is 7% (approximately).

Answer 15

b)

Expert Solution

Answer 16

b)

Expert Solution

Answer 17

Expert Solution

Answer 18

Ch. 10.1 - What is the financial managers goal in selecting...Ch. 10.2 - Prob. 1FOP Ch. 10.2 - What is the payback period? How is it calculated?Ch. 10.2 - What weaknesses are commonly associated with the...Ch. 10.3 - How is the net present value (NPV) calculated for...Ch. 10.3 - Prob. 10.5RQ Ch. 10.3 - Prob. 10.6RQ Ch. 10.4 - Prob. 10.8RQ Ch. 10.4 - Prob. 10.9RQ Ch. 10.4 - Prob. 10.10RQ

The cost of capital of the project. Introduction: The difference between the present value of cash inflows and the present value of cash outflows over a period of time is known as the Net Present value .

To determine: The cost of capital of the project. Introduction: The difference between the present value of cash inflows and the present value of cash outflows over a period of time is known as the Net Present value.

Explanation of Solution

To determine: The cost of capital of the firm. Introduction: The difference between the present value of cash inflows and the present value of cash outflows for a particular period is known as the Net Present value. Cost of capital is the cost of long term financing of the firm.

Explanation of Solution

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Chapter 10 Solutions

To determine: The cost of capital of the project.

Introduction:

The difference between the present value of cash inflows and the present value of cash outflows over a period of time is known as the Net Present value.

To determine: The cost of capital of the firm.

Introduction:

The difference between the present value of cash inflows and the present value of cash outflows for a particular period is known as the Net Present value. Cost of capital is the cost of long term financing of the firm.