Fundamentals of Financial Management (MindTap Course List)
14th Edition
ISBN: 9781285867977
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
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Question
Chapter 11, Problem 16P
a.
Summary Introduction
To calculate: The NPV and IRR of Project A and Project B.
Introduction:
Mutually Exclusive Projects:
It refers to the group of projects in which, if one project is accepted it will automatically imply the rejection of rest. It refers to those projects for which investment cannot be made together.
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.
b.
Summary Introduction
To prepare: The NPV profiles of the two plans and the crossover rate.
Introduction:
Crossover Rate:
It refers to that discounted rate at which the NPV of the two projects becomes equal. It is a cost of capital of the project.
c.
Summary Introduction
To calculate: Crossover rate of the two plans.
d.
Summary Introduction
To explain: The reason of NPV being better than IRR for capital budgeting decisions.
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Excel Online Structured Activity: NPV profiles
A company is considering two mutually exclusive expansion plans. Plan A requires a $40 million expenditure on a large-scale integrated
plant that would provide expected cash flows of $6.39 million per year for 20 years. Plan B requires a $11 million expenditure to build a
somewhat less efficient, more labor-intensive plant with an expected cash flow of $2.47 million per year for 20 years. The firm's WACC is
10%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to
answer the questions below.
X
Open spreadsheet
a. Calculate each project's NPV. Round your answers to two decimal places. Do not round your intermediate calculations. Enter your
answers in millions. For example, an answer of $10,550,000 should be entered as 10.55.
Plan A: $
Plan B: $
Calculate each project's IRR. Round your answer to two decimal places.
Plan A:
Plan B:
million
million
A company is considering two mutually exclusiveexpansion plans. Plan A requires a $40 million expenditure on a large-scale integratedplant that would provide expected cash flows of $6.4 million per year for 20 years. Plan Brequires a $12 million expenditure to build a somewhat less efficient, more labor-intensiveplant with expected cash flows of $2.72 million per year for 20 years. The firm’s WACCis 10%.a. Calculate each project’s NPV and IRR.b. Graph the NPV profiles for Plan A and Plan B and approximate the crossover rate.c. Calculate the crossover rate where the two projects’ NPVs are equal.d. Why is NPV better than IRR for making capital budgeting decisions that add to shareholdervalue?
Excel Online structured Activity: NPV profiles
A company is considering two mutually exclusive expansion plans. Plan A requires a $40 million expenditure on a large-scale integrated plant that would provide expected cash flows of
$6.39 million per year for 20 years. Plan B requires a $13 million expenditure to build a somewhat less efficient, more labor-intensive plant with an expected cash flow of $2.91 million
per year for 20 years. The firm's WACC is 11%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer
the questions below.
Open spreadsheet
a. Calculate each project's NPV. Round your answers to two decimal places. Do not round your intermediate calculations. Enter your answers in millions. For example, an answer of
$10,550,000 should be entered as 10.55.
Plan A: $
million
Plan B: $
million
Calculate each project's IRR. Round your answer to two decimal places.
Plan A:
%
Plan B:
%
b. By graphing the…
Chapter 11 Solutions
Fundamentals of Financial Management (MindTap Course List)
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 K costs 52,125, 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 - Prob. 5PCh. 11 - NPV Your division is considering two projects with...Ch. 11 - CAPITAL BUDGETING CRITERIA A firm with a 14% VVACC...Ch. 11 - Prob. 8PCh. 11 - Prob. 9PCh. 11 - Prob. 10PCh. 11 - CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE...Ch. 11 - IRR AND NPV A company is analyzing two mutually...Ch. 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 - NPV AND IRR A store has 5 years remaining on its...Ch. 11 - Prob. 19PCh. 11 - NPV A project has annual cash flows of 7,500 for...Ch. 11 - MIRR Project X costs 1,000, and its cash flows arc...Ch. 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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