Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 10, Problem 9PS
a)
Summary Introduction
To compute: The projects correct
b)
Summary Introduction
To compute: The projects NPV at 18% discount rate.
c)
Summary Introduction
To discuss: Whether situation in which rate of discount 18% will provide accurate NPV.
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Which of the following is FALSE regarding various methods of project analysis?
Both NPV and IRR consider the time value of money.
Average Accounting Return ignores the time value of money.
Payback focuses on liquidity.
O Profitability Index is able to rank projects in the situation of capital rationing.
() Payback considers the time value of money.
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Which one of the following statements is correct concerning the payback rule?
a. The payback period is computed using the present value of each of the cash flows.
b. The rule says that you should accept a project if the payback period is greater than 1.0.
c. The rule is biased in favour of long-term projects.
d. The rule is flawed because it ignores all cash flows after some arbitrary point in time.
Hardchoice Corp. is a firm considering prospective capital budgeting projects. Selected data on the projects follow: Image attached
1b) Ignoring the information in question (1a), assume instead that projects A and C are independent, Hardchoice is subject to capital rationing (i.e., it may not be able to afford both projects), and the relevant discount rate is 10%.
a) What is the IRR of Project A? Project C?
b) How would you rank Project A compared to Project C?
Pls show formula used.
Final dollar answers should be rounded to two decimal places. Interest rate answers should be rounded to 6 decimal places if expressed as a decimal or 4 decimal places if expressed as a percent.
Use timeline if necessary. No excel .Thanks!
Chapter 10 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 10 - Capital budgeting process True or false? a. The...Ch. 10 - Prob. 2PSCh. 10 - Prob. 3PSCh. 10 - Project analysis True or false? a. Sensitivity...Ch. 10 - Prob. 5PSCh. 10 - Real options True or false? a. Decision trees can...Ch. 10 - Prob. 7PSCh. 10 - Prob. 9PSCh. 10 - Prob. 10PSCh. 10 - Break-even analysis Break-even calculations are...
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- The payback method helps firms establish and identify a maximum acceptable payback period that helps in their capital budgeting decisions. Consider the case of Blue Hamster Manufacturing Inc.: Blue Hamster Manufacturing Inc. is a small firm, and several of its managers are worried about how soon the firm will be able to recover its initial investment from Project Sigma’s expected future cash flows. To answer this question, Blue Hamster’s CFO has asked that you compute the project’s payback period using the following expected net cash flows and assuming that the cash flows are received evenly throughout each year. Complete the following table and compute the project’s conventional payback period. For full credit, complete the entire table. (Note: Round the conventional payback period to two decimal places. If your answer is negative, be sure to use a minus sign in your answer.) Year 0 Year 1 Year 2 Year 3 Expected cash flow -$6,000,000 $2,400,000 $5,100,000…arrow_forwardWhat will happen to the internal rate of return (IRR) of a project if the discount rate is decreased from 8% to 6%? Select one: a. We cannot determine the direction of the effect on IRR from the information provided. b. The change in discount rate will not affect IRR. c. IRR will always increase. d. IRR will always decrease.arrow_forwardA finance director has been asked to explain various methods of project appraisal to his board colleagues. The operations director has already explained to the maring director that: The payback method is a good evaluation tool as it takes into account the liquidity of an individual project The Internal Rate of Return (IRR) calculation is irrelevant as the company does not need to borrow funds for its future projects (1) (2) (3) (4) The Net Present Value (NPV) method is too complicated as various discount rates have to be tried until a zero NPV can be found The Accounting Rate of Return (ARR) would be a good method after the audited accounts are completed and the company's profit margin can be ascertained The finance director has decided he should first inform the managing director that his board colleague has not accurately explained the alternatives, as DA. only statement (1) is true B. only statement (2) is true only statement (3) is true one of the statements are truearrow_forward
- 3. Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. Answer One drawback of the regular payback for evaluating projects is that this method does not properly account for the time value of money. If a project's payback is positive, then the project should be rejected because it must have a negative NPV. The regular payback ignores cash flows beyond the payback pericod, but the discounted payback method overcomes this problem. If a company uses the same payback requirement to evaluate all projects, say it requires a payback of 4 years or less, then the company will tend to reject projects with relatively short lives and accept long-lived projects, and this will cause its risk to increase over time. The longer a project's payback period, the more desirable the project is normally considered to be by this criterion.arrow_forwardWhat information does the payback period provide? Payback period essentially provides the number of years it would take for a project to recover the initial investment from its operating cash flows. As the model was criticized, the model evolved incorporating time value of money to create the discounted payback method. The models still reflected faulty ranking criteria but they provided important information about liquidity and risk. Cash flows expected in the distant future are ____________ risky than cash flows received in the near-term—which suggests that the payback period can also serve as an indicator of project risk. (more or less) Suppose Praxis Corporation’s CFO is evaluating a project with the following cash inflows. She does not know the project’s initial cost; however, she does know that the project’s regular payback period is 2.5 years. Year Cash Flow Year 1 $350,000 Year 2 425,000 Year 3 425,000 Year 4 450,000 If the project’s…arrow_forwardWhich of the following statement about the payback period method for capital budgeting decisions is not correct? The paybackperiod method ignores the time valueof money. A shorter payback period does not always mean that one investment is more desirable than another. When the annual net cash inflow isthe same each year, the payback period = Investment required/Annual netcash inflow. When the net cash flows change from year to year, the payback period = Investment required/Average netcash inflow per year.arrow_forward
- Companies often use several methods to evaluate the project’s cash flows and each of them has its benefits and disadvantages. Based on your understanding of the capital budgeting evaluation methods, which of the following conclusions about capital budgeting are valid? Check all that apply. The discounted payback period improves on the regular payback period by accounting for the time value of money. For most firms, the reinvestment rate assumption in the NPV is more realistic than the assumption in the IRR. Because the MIRR and NPV use the same reinvestment rate assumption, they always lead to the same accept/reject decision for mutually exclusive projects. True or False: Sophisticated firms use only the NPV method in capital budgeting decisions.arrow_forwardThe payback method helps firms establish and identify a maximum acceptable payback period that helps in their capital budgeting decisions. Consider the case of Cold Goose Metal Works Inc.: Cold Goose Metal Works Inc. is a small firm, and several of its managers are worried about how soon the firm will be able to recover its initial investment from Project Beta’s expected future cash flows. To answer this question, Cold Goose’s CFO has asked that you compute the project’s payback period using the following expected net cash flows and assuming that the cash flows are received evenly throughout each year. Complete the following table and compute the project’s conventional payback period. For full credit, complete the entire table. (Note: Round the conventional payback period to the nearest two decimal places. If your answer is negative use a minus sign.) Year 0 Year 1 Year 2 Year 3 Expected cash flow -$4,500,000 $1,800,000 $3,825,000 $1,575,000 Cumulative…arrow_forwardThe payback method helps firms establish and identify a maximum acceptable payback period that helps in their capital budgeting decisions. Consider the case of Cold Goose Metal Works Inc.: Cold Goose Metal Works Inc. is a small firm, and several of its managers are worried about how soon the firm will be able to recover its initial investment from Project Beta’s expected future cash flows. To answer this question, Cold Goose’s CFO has asked that you compute the project’s payback period using the following expected net cash flows and assuming that the cash flows are received evenly throughout each year. Complete the following table and compute the project’s conventional payback period. For full credit, complete the entire table. (Note: Round the conventional payback period to two decimal places. If your answer is negative, be sure to use a minus sign in your answer.) Year 0 Year 1 Year 2 Year 3 Expected cash flow -$4,500,000 $1,800,000 $3,825,000 $1,575,000…arrow_forward
- 19. A financial analyst in Bookman's Book Company just analyzed a capital budgeting project and realized that the IRR of 12% on the project was identical to the company's discount rate of 12%. Which of the following is true regarding the net present value of the project? A. The NPV of the project is positive B. The NPV of the project is zero C. The NPV of the project is negative D. More information is needed to answer the question 20. When a company's discount rate increases, which of the following is true for a project that currently has a net present value of $105,325.69 and an IRR of 15.66%? A. The company's IRR will increase B. The company's IRR will decrease C. The company's net present value will increase D. The company's net present value will decrease 21. Which of the following is a period cost for a computer manufacturer: A. Wages for assembly line workers B. Glue for computers C. Rent for factory building D. None of the above 22. If the LHK Company had a per unit cost that…arrow_forwardPlease do 22, 23, 26arrow_forwardThe Wonder Company uses only the IRR method for capital budgeting. Suppose it is considering a project with expenditures of -$93 today at t = 0. There is no t = 1 cash flow, but at t = 2, there is a positive cash flow of $108. There are no other cash flows attributed to this project. Calcuate to a four-place precision the IRR for The wonder company and then convert to a two-place percent for input.arrow_forward
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