Financial Management: Theory & Practice
16th Edition
ISBN: 9781337909730
Author: Brigham
Publisher: Cengage
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Chapter 11, Problem 8P
The Rodriguez Company is considering an average-risk investment in a mineral water spring project that has an initial after-tax cost of $170,000. The project will produce 1,000 cases of mineral water per year indefinitely, starting at Year 1. The Year-1 sales price will be $138 per case, and the Year-1 cost per case will be $105. The firm is taxed at a rate of 25%. Both prices and costs are expected to rise after Year 1 at a rate of 6% per year due to inflation. The firm uses only equity, and it has a cost of capital of 15%. Assume that cash flows consist only of after-tax profits because the spring has an indefinite life and will not be
- a. What is the
present value of future cash flows? (Hint: The project is a growing perpetuity, so you must use the constant growth formula to find itsNPV .) What is the NPV? - b. Suppose that the company had forgotten to include future inflation. What would they have incorrectly calculated as the project’s NPV?
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Chapter 11 Solutions
Financial Management: Theory & Practice
Ch. 11 - Prob. 2QCh. 11 - Why is it true, in general, that a failure to...Ch. 11 - Prob. 4QCh. 11 - Explain how net operating working capital is...Ch. 11 - How do simulation analysis and scenario analysis...Ch. 11 - Why are interest charges not deducted when a...Ch. 11 - Most firms generate cash inflows every day, not...Ch. 11 - What are some differences in the analysis for a...Ch. 11 - Distinguish among beta (or market) risk,...Ch. 11 - Prob. 11Q
Ch. 11 - Talbot Industries is considering launching a new...Ch. 11 - The financial staff of Cairn Communications has...Ch. 11 - Allen Air Lines must liquidate some equipment that...Ch. 11 - Although the Chen Company’s milling machine is...Ch. 11 - Wendys boss wants to use straight-line...Ch. 11 - The Campbell Company is considering adding a...Ch. 11 - The president of your company, MorChuck...Ch. 11 - The Rodriguez Company is considering an...Ch. 11 - St. Johns River Shipyards welding machine is 15...Ch. 11 - Shao Industries is considering a proposed project...Ch. 11 - The Everly Equipment Company’s flange-lipping...Ch. 11 - The Bartram-Pulley Company (BPC) must decide...Ch. 11 - The Yoran Yacht Company (YYC), a prominent...Ch. 11 - Shrieves Casting Company is considering adding a...Ch. 11 - Disregard the assumptions in Part a. What is the...Ch. 11 - Prob. 3MCCh. 11 - Prob. 4MCCh. 11 - Estimate the required net operating working...Ch. 11 - Prob. 6MCCh. 11 - Calculate the project cash flows for each year....Ch. 11 - Prob. 8MCCh. 11 - What is a real option? What are some types of real...
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