Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 11, Problem 11.6CTF
Pavloki, Inc., has three proposed projects with positive
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The Weiland Computer Corporation is trying to choose between the following mutually exclusive design projects, P1 and P2:
Year
0
1
2
3
Cash flows (P1)
-$53,000
27,000
27,000
27,000
Cash flow (P2)
-$16,000
9,100
9,100
9,100
If the discount rate is 10 percent and the company applies the profitability index (PI) decision rule, which project should the firm accept?
If the firm applies the Net Present Value (NPV) decision rule, which project should it take?
Are your answers in (a) and (b) different? Explain why?
Jefferson International is trying to choose between the following two mutually exclusive design
projects:
Cash Flow (B)
-$38,000
Year
Cash Flow (A
-$75,000
32.400
17,800
30,200
14,200
3
36.600
19.800
The required return is 12 percent. If the company applies the profitability index (PI) decision rule,
which project should the firm accept? If the company applies the NPV decision rule, which project
should it take? Given your first two answers, which project should the firm actually accept?
Project A; Project B; Project A
O Project A; Project B; Project B
O Project B; Project A; Project A
O Project B; Project A; Project B
O Project B; Project B, Project B
Adam Andler Corp is analyzing an average-risk project, and the following data have been developed. Unit sales will be constant, but the sales price should increase with inflation. Fixed costs will also be constant, but variable costs should rise with
inflation. The project should last for 3 years. This is just one of many projects for the firm, so any losses on this project can be used to offset gains on other firm projects. What is the project's expected NPV? Do not round the intermediate calculations
and round the final answer to the nearest whole number.
WACC or cost of capital
Net investment cost (depreciable basis)
The salvage value of its equipment
No other fixed assets will be acquired for following years
The company will require an increase in net working capital at the
$10,000
beginning
The company will liquidate all working capital at the end of the project -10,000
Units sold (constant through years)
60,000
$30.00
$50,000
$17.00
Average price per unit, Year 1
Fixed operating…
Chapter 11 Solutions
Fundamentals of Corporate Finance
Ch. 11.1 - Prob. 11.1ACQCh. 11.1 - What are some potential sources of value in a new...Ch. 11.2 - Prob. 11.2ACQCh. 11.2 - What are the drawbacks to the various types of...Ch. 11.3 - How are fixed costs similar to sunk costs?Ch. 11.3 - What is net income at the accounting break-even...Ch. 11.3 - Why might a financial manager be interested in the...Ch. 11.4 - If a project breaks even on an accounting basis,...Ch. 11.4 - If a project breaks even on a cash basis, what is...Ch. 11.4 - Prob. 11.4CCQ
Ch. 11.5 - What is operating leverage?Ch. 11.5 - How is operating leverage measured?Ch. 11.5 - Prob. 11.5CCQCh. 11.6 - What is capital rationing? What types are there?Ch. 11.6 - Prob. 11.6BCQCh. 11 - Prob. 11.1CTFCh. 11 - Marcos Entertainment expects to sell 84,000...Ch. 11 - Delta Tool has projected sales of 8,500 units at a...Ch. 11 - What is true for a project if that project is...Ch. 11 - A capital-intensive project is one that has a...Ch. 11 - Pavloki, Inc., has three proposed projects with...Ch. 11 - Forecasting Risk [LO1] What is forecasting risk?...Ch. 11 - Sensitivity Analysis and Scenario Analysis [LO1,...Ch. 11 - Prob. 3CRCTCh. 11 - Operating Leverage [LO4] At one time at least,...Ch. 11 - Operating Leverage [LO4] Airlines offer an example...Ch. 11 - Prob. 6CRCTCh. 11 - Prob. 7CRCTCh. 11 - Prob. 8CRCTCh. 11 - Prob. 9CRCTCh. 11 - Scenario Analysis [LO2] You are at work when a...Ch. 11 - Calculating Costs and Break-Even [LO3] Night...Ch. 11 - Prob. 2QPCh. 11 - Scenario Analysis [LO2] Sloan Transmissions, Inc.,...Ch. 11 - Sensitivity Analysis [LO1] For the company in the...Ch. 11 - Sensitivity Analysis and Break-Even [LO1, 3] We...Ch. 11 - Prob. 6QPCh. 11 - Prob. 7QPCh. 11 - Calculating Break-Even [LO3] In each of the...Ch. 11 - Calculating Break-Even [LO3] A project has the...Ch. 11 - Using Break-Even Analysis [LO3] Consider a project...Ch. 11 - Calculating Operating Leverage [LO4] At an output...Ch. 11 - Leverage [LO4] In the previous problem, suppose...Ch. 11 - Operating Cash Flow and Leverage [LO4] A proposed...Ch. 11 - Cash Flow and Leverage [LO4] At an output level of...Ch. 11 - Prob. 15QPCh. 11 - Prob. 16QPCh. 11 - Sensitivity Analysis [LO1] Consider a four-year...Ch. 11 - Operating Leverage [LO4] In the previous problem,...Ch. 11 - Project Analysis [LO1, 2, 3, 4] You are...Ch. 11 - Project Analysis [LO1, 2] McGilla Golf has decided...Ch. 11 - Prob. 21QPCh. 11 - Sensitivity Analysis [LO1] McGilla Golf would like...Ch. 11 - Break-Even Analysis [LO3] Hybrid cars are touted...Ch. 11 - Break-Even Analysis [LO3] In an effort to capture...Ch. 11 - Prob. 25QPCh. 11 - Operating Leverage and Taxes [LO4] Show that if we...Ch. 11 - Scenario Analysis [LO2] Consider a project to...Ch. 11 - Sensitivity Analysis [LO1] In Problem 27, suppose...Ch. 11 - Prob. 29QPCh. 11 - Prob. 30QP
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- The Webex Corporation is trying to choose between the following two mutually exclusive designprojects: Year Net Cash Flow Project - I($) Net Cash Flow Project - II($) 0 (53,000) (16,000) 1 27000 9100 2 27000 9100 3 27000 9100 (a) If the required return is 10% and the company applies the Profitability Index decision rule,which project should the firm accept?(b) If the company applies the Net Present Value decision rule, which project should it take?(c) Explain why your answers in (a) and (b) are different(d) Calculate the Internal Rate of Return of both projects.arrow_forwardCVD Ltd needs to choose from three mutually exclusive projects. The net cash flows from the projects will depend on market demand. All of the projects will last for only one year. The forecast net cash flows and their associated probabilities are given below:Market Demand Probability Weak 0.20 Average 0.50 Good 0.30 Market Demand Project A Project B Project C Weak R450 000 R350 000 R550 000 Average R550 000 R400 000 R500 000 Good R650 000 R450 000 R700 000 Required:Calculate the expected value of the net cash flows from each of the three projects.arrow_forwardThe Weiland Computer Corporation is trying to choose between the following mutually exclusive design projects, P1 and P2: Year 1 3 Cash flows (P1) -$53,000 27,000 27,000 27,000 Cash flows (P2) -$16,000 9,100 9,100 9,100 a. If the discount rate is 10 percent and the firm applies the Net Present Value (NPV) decision rule, which project should the firm accept? b. If the firm applies the profitability index (PI) decision rule, which project should it take?arrow_forward
- A firm is considering two investment projects, Y and Z. These projects are NOT mutually exclusive. Assume the firm is not capital constrained. The initial costs and cashflows for these projects are: 0 1 2 3 Y -40,000 17,000 17,000 15,000 Z -28,000 12,000 12,000 20,000 Using a discount rate of 9% calculate the net present value for each project. What decision would you make based on your calculations? How would your decision change if the discount rate used for calculating the net present value is 15%? Calculate an approximate IRR for each project. Assume the hurdle rate is 9%. What decision would you make based on your calculations? Calculate the payback period for each project. The company looks to select investment projects paying back in 2 years. What decision would you make based on your calculations? Critically discuss Net Present Value (NPV), Internal Rate of Return (IRR) and payback period as criteria for investment appraisal.arrow_forwardYokam Company is considering two alternative projects. Project 1 requires an initial investment of $470,000 and has a present value of all its cash flows of $2,350,000. Project 2 requires an initial investment of $5,000,000 and has a present value of all its cash flows of $6,000,000. (a) Compute the profitability index for each project. (b) Based on the profitability index, which project should the company select? Complete this question by entering your answers in the tabs below. Required A Required B Compute the profitability index for each project. Profitability Index Numerator: Denominator: Profitability Index = Profitability index Project 1 Project 2arrow_forwardYokam Company is considering two alternative projects. Project 1 requires an initial investment of $400,000 and has a present value of cash flows of $1,100,000. Project 2 requires an initial investment of $4 million and has a present value of cash flows of $6 million. Compute the profitability index for each project. Based on the profitability index, which project should the company prefer? Explain.arrow_forward
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- The Michner corporation is trying is trying to choose between the following 2 mutually exclusive design project: Cash Flow 1 Cash Flow 2 Year 0: -82000 -21700 Year 1: 37600 11200 Year 2: 37600 11200 Year 3: 37600 11200 If the required return is 10% and the company applies the profitability index decision rule, which project should the firm accept? If the company applies the NPV decision rule, which project should it take? why are a & b are differentarrow_forwardProject A has an IRR of 14% and NPV of $8,000 while project B has an IRR of 17% and an NPV of $5,000. Which project should you do if the projects are mutually exclusive, and the discount rate is 9%? a. A O b. B O c. Both A and B d. You should calculate profitability index. O e. Neither A nor B because both decision rules give contradictory recommendations.arrow_forwardNast Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher MIRR rather than the one with the higher NPV, how much value will be forgone? Note that under some conditions choosing projects on the basis of the MIRR will cause $0.00 value to be lost. WACC: 10.75% 1 2 4 CFs -$1,100 $375 $375 $375 $375 CFL -$2,200 $725 $725 $725 $725 O a. $6.49 b. $9.40 c. $0.00 O d. $6.66 O e. $7.66arrow_forward
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