Financial Management: Theory & Practice
16th Edition
ISBN: 9781337909730
Author: Brigham
Publisher: Cengage
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Textbook Question
Chapter 10, Problem 9MC
- (1) What is the payback period? Find the paybacks for Franchises L and S.
- (2) What is the rationale for the payback method? According to the payback criterion, which franchise or franchises should be accepted if the firm’s maximum acceptable payback is 2 years and if Franchises L and S are independent? If they are mutually exclusive?
- (3) What is the difference between the regular and discounted payback periods?
- (4) What is the main disadvantage of discounted payback? Is the payback method of any real usefulness in capital budgeting decisions?
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1. Prepare a contribution format income statement that shows the expected net operating income each year from the franchise outlet.
2-a. Compute the simple rate of return promised by the outlet.
2-b. If Mr. Swanson requires a simple rate of return of at least 18%, should he acquire the franchise?
3-a. Compute the payback period on the outlet.
3-b. If Mr. Swanson wants a payback of two years or less, will he acquire the franchise?
c. What are the interest tax shields from the project? What is their present value?
d. Show that the APV of Alcatel-Lucent's project matches the value computed using the WACC method
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The Bramble Company manufactures 3,800 units of a part that could be purchased from an outside supplier for $14 each. Bramble's
costs to manufacture each part are as follows:
Direct materials
$3
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
9.
Total
$19
All fixed overhead is unavoidable and is allocated based on direct labor. The facilities that are used to manufacture the part have no
alternative uses.
(a-b)
Gress margin-ISalos Cost/Sales
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Chapter 10 Solutions
Financial Management: Theory & Practice
Ch. 10 - Define each of the following terms:
Capital...Ch. 10 - What types of projects require the least detailed...Ch. 10 - Explain why the NPV of a relatively long-term...Ch. 10 - When two mutually exclusive projects are being...Ch. 10 - Suppose a firm is considering two mutually...Ch. 10 - A project has an initial cost of 40,000, expected...Ch. 10 - Refer to Problem 10-1. What is the project’s IRR?
Ch. 10 - Refer to Problem 10-1. What is the projects MIRR?Ch. 10 - Prob. 4PCh. 10 - Prob. 5P
Ch. 10 - Prob. 6PCh. 10 - Your division is considering two investment...Ch. 10 - Edelman Engineering is considering including two...Ch. 10 - Davis Industries must choose between a gas-powered...Ch. 10 - Project S has a cost of 10,000 and is expected to...Ch. 10 - Your company is considering two mutually exclusive...Ch. 10 - Prob. 12PCh. 10 - Cummings Products is considering two mutually...Ch. 10 - Prob. 14PCh. 10 - Prob. 15PCh. 10 - Shao Airlines is considering the purchase of two...Ch. 10 - The Perez Company has the opportunity to invest in...Ch. 10 - Filkins Fabric Company is considering the...Ch. 10 - Prob. 19PCh. 10 - The Aubey Coffee Company is evaluating the...Ch. 10 - Your division is considering two investment...Ch. 10 - Prob. 22PCh. 10 - Start with the partial model in the file Ch10 P23...Ch. 10 - What is capital budgeting?Ch. 10 - Prob. 2MCCh. 10 - c. (1) Define the term net present value (NPV)....Ch. 10 - Prob. 4MCCh. 10 - Draw NPV profiles for Franchises L and S. At what...Ch. 10 - What is the underlying cause of ranking conflicts...Ch. 10 - Define the term modified IRR (MIRR). Find the...Ch. 10 - What does the profitability index (PI) measure?...Ch. 10 - (1) What is the payback period? Find the paybacks...Ch. 10 - Prob. 10MCCh. 10 - In an unrelated analysis, you have the opportunity...Ch. 10 - You are also considering another project that has...
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Define the term “net present value (NPV).” What is each franchise’s NPV? What is the rationale behind the NPV method? According to NPV, which franchise or franchises should be accepted if they are independent? Mutually exclusive? Would the NPVs change if the cost of capital changed?arrow_forwardc. (1) Define the term net present value (NPV). What is each franchises NPV? (2) What is the rationale behind the NPV method? According to NPV, which franchise or franchises should be accepted if they are independent? Mutually exclusive? (3) Would the NPVs change if the cost of capital changed?arrow_forward7. What is the payback period? ?arrow_forward
- If two mutually exclusive projects were being compared, would a high cost of capital favor the longer-term or the shorter-term project? Why? If the cost of capital declined, would that lead firms to invest more in longer-term projects or shorter-term projects? Would a decline (or an increase) in the WACC cause changes in the IRR ranking of mutually exclusive projects?Note: DONOT GIVE BREIF ANSWER USE SHORT CONCEPTUAL ANSWERarrow_forwardAnswer the question e and farrow_forwardAnswer c and darrow_forward
- Answer g and harrow_forwardShould companies bid for a project with a price under the "project bid price"? No, this will not make financial sense. It depends on the project payback time. Yes, because they will still have positive profits.arrow_forwardInland development projects, why do lenders insist on loan repayment rates in excess of the sales revenue? What is the release price?arrow_forward
- Assume a project has a discounted payback that equals the project's life. The project's sales quantity must be at which one of these break-even points? Select one: O a. Accounting O b. Leveraged O c. Marginal O d. Cash Oe. Financialarrow_forwardReynolds Construction (RC) needs a piece of equipment that costs 200. RC can either lease the equipment or borrow 200 from a local bank and buy the equipment. Reynoldss balance sheet prior to the acquisition of the equipment is as follows: a. (1) What is RCs current debt ratio? (2) What would be the companys debt ratio if it purchased the equipment? (3) What would be the debt ratio if the equipment were leased and the lease not capitalized? (4) What would be the debt ratio if the equipment were leased and the lease were capitalized? Assume that the present value of the lease payments is equal to the cost of the equipment. b. Would the companys financial risk be different under the leasing and purchasing alternatives?arrow_forwardThe terminal cap rate used for valuation purposes in a DCF is fundamentally different than the discount rate used in that same DCF. The assumed sale of the property takes place at the end of your hold period, generally 10 years later in most models. The property is older and the market and the economy have changed. With that said, what do you believe to be the right approach for terminal cap rate selection in a DCF on a development project and why?arrow_forward
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