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a.
To prepare: NPV profiles for Plan A and B, IRR of the two plans and approximate crossover rate and IRR of each plan.
Introduction:
It is a method under capital budgeting which includes the calculation of net present value of the project in which the company is investing. The calculation is done by calculating the difference between the value of
It refers to the rate of return that is computed by the company to make a decision regarding the selection of a project for investment. This rate provides the basis for selection of projects with lower cost of capital and rejection of project with higher cost of capital.
Crossover Rate:
It refers to the discounted rate at which the NPV of the two projects becomes equal. It is a cost of capital of the project.
b.
To explain: Whether it is logical for a firm to accept all the projects with returns greater than 12% WACC and whether this implies that the WACC is the correct reinvestment rate of assumption for the project cash flows.
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Chapter 11 Solutions
Fundamentals Of Financial Management, Concise Edition (mindtap Course List)
- Project S has a cost of $10,000 and is expected to produce benefits (cash flows) of $3,000 per year for 5 years. Project L costs $25,000 and is expected to produce cash flows of $7,400 per year for 5 years. Calculate the two projects’ NPVs, IRRs, MIRRs, and PIs, assuming a cost of capital of 12%. Which project would be selected, assuming they are mutually exclusive, using each ranking method? Which should actually be selected?arrow_forwardAn oil-drilling company must choose between two mutually exclusive extraction projects, and each requires an initial outlay at t = 0 of $12.6 million. Under Plan A, all the oil would be extracted in 1 year, producing a cash flow at t = 1 of $15.12 million. Under Plan B, cash flows would be $2.2389 million per year for 20 years. The firm's WACC is 12.9%. Construct NPV profiles for Plans A and B. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. If an amount is zero, enter "0". Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to two decimal places. Identify the IRR of Plans A & B. Round your answers to two decimal places. Find the crossover rate. Round your answers to two decimal places.arrow_forwardGive typing answer with explanation and conclusion Project S requires an initial outlay at t = 0 of $13,000, and its expected cash flows would be $5,000 per year for 5 years. Mutually exclusive Project L requires an initial outlay at t = 0 of $28,000, and its expected cash flows would be $13,850 per year for 5 years. If both projects have a WACC of 15%, which project would you recommend? Select the correct answer. a. Neither Project S nor L, because each project's NPV < 0. b. Both Projects S and L, because both projects have NPV's > 0. c. Project S, because the NPVS > NPVL. d. Both Projects S and L, because both projects have IRR's > 0. e. Project L, because the NPVL > NPVS.arrow_forward
- Project S requires an initial outlay at t = 0 of $19,000, and its expected cash flows would be $5,500 per year for 5 years. Mutually exclusive Project L requires an initial outlay at t = 0 of $37,000, and its expected cash flows would be $10,800 per year for 5 years. If both projects have a WACC of 13%, which project would you recommend? Select the correct answer. a. Project L, because the NPVL > NPVS. b. Neither Project S nor L, because each project's NPV < 0. c. Both Projects S and L, because both projects have NPV's > 0. d. Both Projects S and L, because both projects have IRR's > 0. e. Project S, because the NPVS > NPVL.arrow_forwardNPV and IRR Benson Designs has prepared the following estimates for a long-term project it is considering. The initial investment is $36,310, and the project will yield cash inflows of $8,000 per year for 7 years. The firm has a cost of capital of 12%. a. Determine the net present value (NPV) for the project. b. Determine the internal rate of return (IRR) for the project. c. Would you recommend that the firm accept or reject the project?arrow_forwardConsider the following two investment alternatives: The firm's MARR is known to be 15%.(a) Compute the IRR of Project B.(b) Compute the PW of Project A. (c) Suppose that Projects A and B are mutually exclusive. Using the IRR, whichproject would you select?arrow_forward
- 9. Project S requires an initial outlay at t = 0 of $19,000, and its expected cash flows would be $4,000 per year for 5 years. Mutually exclusive Project L requires an initial outlay at t = 0 of $28,000, and its expected cash flows would be $12,150 per year for 5 years. If both projects have a WACC of 13%, which project would you recommend? Select the correct answer. a. Project S, because the NPVS > NPVL. b. Neither Project S nor L, because each project's NPV < 0. c. Both Projects S and L, because both projects have IRR's > 0. d. Both Projects S and L, because both projects have NPV's > 0. e. Project L, because the NPVL > NPVS. 10arrow_forwardNPV and IRR Benson Designs has prepared the following estimates for a long-term project it is considering. The initial investment is $37,770, and the project will yield cash inflows of $5,000 per year for 12 years. The firm has a cost of capital of 15%. a. Determine the net present value (NPV) for the project. b. Determine the internal rate of return (IRR) for the project. c. Would you recommend that the firm accept or reject the project? a. The NPV of the project is $ (Round to the nearest cent)arrow_forwardNPV and IRR Benson Designs has prepared the following estimates for a long-term project it is considering. The initial investment is $24,950, and the project will yield cash inflows of $8,000 per year for 5 years. The firm has a cost of capital of 15%. a. Determine the net present value (NPV) for the project. b. Determine the internal rate of return (IRR) for the project. c. Would you recommend that the firm accept or reject the project? a. The NPV of the project is $ (Round to the nearest cent.) b. The IRR of the project is%. (Round to two decimal places.) c. Would you recommend that the firm accept the project? (Select the best answer below.) Yes O No 4arrow_forward
- Unequal lives-ANPV approach Portland Products is considering the purchase of one of three mutually exclusive projects for increasing production efficiency. The firm plans to use a 13.1% cost of capital to evaluate these equal-risk projects. The initial investment and annual cash inflows over the life of each project are shown in the following table. (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) Initial investment (CF) Year (t) 1 2345678 u. VUIMMU BIV TRE Project X $78,000 $16,700 25,100 33,000 40,800 PETIT. Project X Project Z Project Y Project Y $52,000 Cash inflows (CF) $27,800 38,200 a. Calculate the NPV for each project over its life. Rank the projects in descending order on the basis of NPV. b. Use the annualized net present value (ANPV) approach to evaluate and rank the projects in descending order on the basis of ANPV c. Compare and contrast your findings in parts (a) and (b). Which project would you recommend that the firm…arrow_forwardCalculate the Profitability Index for Project A A firm is considering the following mutually exclusive investment projects. Project A requires an initial outlay of $500 and will return $120 per year for the next seven years. Project B requires an initial outlay of $5,000 and will return $1,350 per year for the next five years. The required rate of return is 10%. Use th Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a b с 1.1684 1.2973 1.3476 d 1.4786arrow_forwardCan you answer this queston from the image below. Determine the crossover rate. Approximate your answer to the nearest whole number.arrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENTManagerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College PubFinancial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,
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