Bundle: Fundamentals of Financial Management, Loose-leaf Version, 15th + MindTap Finance, 1 term (6 months) Printed Access Card
15th Edition
ISBN: 9781337817455
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
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Textbook Question
Chapter 11, Problem 10P
CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE PROJECTS A firm with a WACC of 10% is considering the following mutually exclusive projects:
Which project would you recommend? Explain.
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Using the NPV index approach to ranking projects, which projects should the firm accept?
A. 1, 6, 5 and 3
B. 1, 2, 3, and 5
C. 2, 3, 4, and 6
D. 1, 3, 4, and 6
The capital budgeting decision that requires a choice between two decisions is a(n) _______ project.
Independent
Dependent
Mutually exclusive
Inclusive
The actual value that a firm loses when it makes a capital budgeting decision is a(n) ______ cost
Fixed
Opportunity
Sample
Unknown
The number of years required for an investment to return the monies invested is known as a projects
Economic life
Usage rate
Capital decision
Payback period
The future benefits received from investing in a project are the projects
Net cash flows
Net investment
Net cost
Net return
The capital components included in a firms weighted cost of capital are
Common stock
Debt
Retained earnings
All of the above
Weaknesses in using solely the payback method as a measure of a projects risk include
Not accounting for the time value of money
There is no objective criterion for deciding what is an acceptable payback period
Cash flows that occur after the payback period have no impact on the…
Marginal analysis and capital budgeting decisions. A company faces the following schedule of potential
investment projects (all assumed to be equal risk).
Use marginal analysis to decide which projects should NOT be undertaken?
Expected Rate of
Return (%)
Project
alm|0|n|u|u
A
B
с
D
E
F
CH
G
1
Investment
Required ($
million)
25
15
40
35
12
20
18
13
7
OF and G
OH and I
OF, G, H, and I
01
OG, H, I
27
24
21
18
15
14
13
11
8
Cumulative
Investment
The following is the cost of acquiring the funds needed to finance these investment projects.
Cost of Capital (%)
Block of funds ($ million)
First 50
10
Next 25
10.5
11
Next 40
Next 50
12.2
Next 20
14.5
25
40
80
115
127
147
165
178
185
50
75
115
165
185
Cumulative Funds Raised
Chapter 11 Solutions
Bundle: Fundamentals of Financial Management, Loose-leaf Version, 15th + MindTap Finance, 1 term (6 months) Printed Access Card
Ch. 11 - How are project classifications used in the...Ch. 11 - Prob. 2QCh. 11 - Why is the NFV of a relatively long-term project...Ch. 11 - Prob. 4QCh. 11 - If two mutually exclusive projects were being...Ch. 11 - Discuss the following statement: If a firm has...Ch. 11 - Why might it be rational for a small firm that...Ch. 11 - Project X is very risky and has an NPV of 3...Ch. 11 - Prob. 9QCh. 11 - A firm has a 100 million capital budget. It is...
Ch. 11 - NPV Project L costs 65,000, its expected cash...Ch. 11 - IRR Refer to problem 11-1. What is the projects...Ch. 11 - MIRR Refer to problem 11-1. What is the projects...Ch. 11 - Prob. 4PCh. 11 - DISCOUNTED PAYBACK Refer to problem 11-1. What is...Ch. 11 - NPV Your division is considering two projects with...Ch. 11 - CAPITAL BUDGETING CRITERIA A firm with a 14% WACC...Ch. 11 - Prob. 8PCh. 11 - CAPITAL BUDGETING CRITERIA: ETHICAL CONSIDERATIONS...Ch. 11 - CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE...Ch. 11 - CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE...Ch. 11 - Prob. 12PCh. 11 - MIRR A firm is considering two mutually exclusive...Ch. 11 - CHOOSING MANDATORY PROJECTS ON THE BASIS OF LEAST...Ch. 11 - NPV PROFILES: TIMING DIFFERENCES An oil-drilling...Ch. 11 - Prob. 16PCh. 11 - CAPITAL BUDGETING CRITERIA A company has an 11%...Ch. 11 - NPV AND IRR A store has 5 years remaining on its...Ch. 11 - Prob. 19PCh. 11 - NPV A project has annual cash flows of 5,000 for...Ch. 11 - Prob. 21PCh. 11 - MIRR A project has the following cash flows: This...Ch. 11 - CAPITAL BUDGETING CRITERIA Your division is...Ch. 11 - BASICS OF CAPITAL BUDGETING You recently went to...
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- Q.1. Three mutually exclusive investment alternatives are under consideration. The initial capital outlays and the pattern of the net annual cash benefits (revenues - expenses) for each alternatives are presented in the following table. Based on NPV analysis, if the company’s minimum acceptable rate of return is 10%, which alternative should be the best economic choice? Use appropriate IRR analysis to double-check your selection. Investment, M$ A B C Initial cost -$200 -$350 -$500 Net Revenues, year 1 to 3 $80 $105 $85 Net Revenues, year 4 $60 $90 $150 Net Revenues, year 5 $40 $80 $250arrow_forwardCapital Budgeting Decision Measurement Methods Prior to deciding on which long-term project/investment is most suitable, a company is going to analyze different options by considering various capital budgeting decision measurement methods. Some of these measurement methods include but not limited to payback period, discounted payment period, net present value, and internal rate of return. If you have a business and would like to invest in equipment that costs $1,000,000, which measurement method would you choose and why?arrow_forwardUsing Net Present Value Approach of ranking projects, which projects should the firm accept?arrow_forward
- All techniques: Decision among mutually exclusive investments Pound Industries is attempting to select the best of three mutually exclusive projects. The initial investment and subsequent cash inflows associated with these projects are shown in the following table. Cash flows Initial investment (CF) Cash inflows (CF), t= 1 to 5 OA. Project A a. Calculate the payback period for each project. b. Calculate the net present value (NPV) of each project, assuming that the firm has a cost of capital equal to 11%. c. Calculate the internal rate of return (IRR) for each project. d. Indicate which project you would recommend. a. The payback period of project A is The payback period of project B is The payback period of project C is b. The NPV of project A is $ The NPV of project B is $ (Round to the nearest cent.) The NPV of project C is $. (Round to the nearest cent.) c. The IRR of project A is%. (Round to two decimal places.) The IRR of project B is %. (Round to two decimal places.) The IRR of…arrow_forwardEvaluate the projects using each of the following criteria, stating which project(s) Carrium Insights Inc. should choose under each criteria and why: i.Discounted Payback ii.Net Present Valuearrow_forwardI need solution on excel sheetarrow_forward
- Financearrow_forwardCAPITAL BUDGETING CRITERIA Your division is considering two projects. Its WACC is 10%, and the projects’ after-tax cash flows (in millions of dollars) would be as follows: REFER IMAGE a. Calculate the projects’ NPVs, IRRs, MIRRs, regular paybacks, and discounted paybacks.b. If the two projects are independent, which project(s) should be chosen?c. If the two projects are mutually exclusive and the WACC is 10%, which project(s) should be chosen?d. Plot NPV profiles for the two projects. Identify the projects’ IRRs on the graph.e. If the WACC was 5%, would this change your recommendation if the projects were mutually exclusive? If the WACC was 15%, would this change your recommendation? Explain your answers.f. The crossover rate is 13.5252%. Explain what this rate is and how it affects the choice between mutually exclusive projects.g. Is it possible for conflicts to exist between the NPV and the IRR when independent projects are being evaluated? Explain your answer.h. Now look at the…arrow_forwardProfitability index. Given the discount rate and the future cash flow of each project listed in the following table, , use the PI to determine which projects the company should accept. ..... What is the Pl of project A? (Round to two decimal places.)arrow_forward
- (question3 c,d) c) Calculate the profitability index (PI) for each project d) Calculate the internal rate of return (IRR) for each project.arrow_forwardThe cost of capital for a new project: Multiple Choice 1.) is determined by the overall risk level of the firm. 2.) is dependent upon the source of the funds obtained to fund that project. 3.) is dependent upon the firm's overall capital structure. 4.) should be applied as the discount rate for all other projects considered by the firm. 5.) depends upon how the funds raised for that project are going to be spent.arrow_forwardWhich project(s) should a firm choose when the projects are independent? When they are mutually exclusive? Suppose both are within the capital budget and k is 10 percent for both projects. Project A: CF0 = −$2550; CF1 = $1010; CF2 = $4010; CF3 = $1510Project B: CF0 = −$2550; CF1 = $1010; CF2 = $1010; CF3 = $4410 Both projects; project A Neither project; neither project Project B; project B Both projects; project Barrow_forward
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