Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Chapter 12, Problem 11P
Summary Introduction
To compute: The Modified
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Data table
(Click on the following icon in order to copy its contents into a spreadsheet.)
Cash Flow Today ($ millions)
Project
A
-6
B
с
2
25
L
Cash Flow in One Year ($ millions)
22
5
- 8
<
Project X is very risky and has an NPV of $3 million. Project Y is very safe and has an NPVof $2.5 million. They are mutually exclusive, and project risk has been properly consideredin the NPV analyses. Which project should be chosen? Explain.
A firm has two potential investment projects. The project information is summarised in the table
below.
Project A
$670
Project B
$700
Expected value of profit
Standard deviation of profit
Coefficient of variation of profit
175
370
0.26
0.53
Which project has a lower absolute risk level? Which project has a lower relative risk level? Which
project would you advise the firm to choose? Explain your answers.
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Chapter 12 Solutions
Intermediate Financial Management (MindTap Course List)
Ch. 12 - What types of projects require the least detailed...Ch. 12 - Prob. 3QCh. 12 - Prob. 4QCh. 12 - Prob. 5QCh. 12 - A project has an initial cost of 40,000, expected...Ch. 12 - IRR Refer to Problem 12-1. What is the projects...Ch. 12 - Prob. 3PCh. 12 - Prob. 4PCh. 12 - Prob. 5PCh. 12 - Prob. 6P
Ch. 12 - Your division is considering two investment...Ch. 12 - Edelman Engineering is considering including two...Ch. 12 - Prob. 9PCh. 12 - Project S has a cost of $10,000 and is expected to...Ch. 12 - Prob. 11PCh. 12 - After discovering a new gold vein in the Colorado...Ch. 12 - Prob. 13PCh. 12 - Prob. 14PCh. 12 - The Pinkerton Publishing Company is considering...Ch. 12 - Shao Airlines is considering the purchase of two...Ch. 12 - The Perez Company has the opportunity to invest in...Ch. 12 - Filkins Fabric Company is considering the...Ch. 12 - The Ulmer Uranium Company is deciding whether or...Ch. 12 - The Aubey Coffee Company is evaluating the...Ch. 12 - Your division is considering two investment...Ch. 12 - The Scampini Supplies Company recently purchased a...Ch. 12 - You have just graduated from the MBA program of a...Ch. 12 - Prob. 2MCCh. 12 - Define the term “net present value (NPV).” What is...Ch. 12 - Prob. 4MCCh. 12 - Prob. 5MCCh. 12 - What is the underlying cause of ranking conflicts...Ch. 12 - Prob. 7MCCh. 12 - Prob. 8MCCh. 12 - Prob. 9MCCh. 12 - Prob. 10MCCh. 12 - In an unrelated analysis, you have the opportunity...Ch. 12 - Prob. 12MC
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- Suppose Hungry Whale Electronics is evaluating a proposed capital budgeting project (project Alpha) that will require an initial investment of $400,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $325,000 Year 2 $475,000 Year 3 $475,000 Year 4 $450,000 Hungry Whale Electronics's weighted average cost of capital is 9%, and project Alpha has the same risk as the firm's average project. Based on the cash flows, what is project Alpha's net present value (NPV)? $1,131,073 $983,542 $1,458,542 $1,433,542arrow_forwardProjects A and B are mutually exclusive. If project A, the larger project, has an approximate ERR of 20 percent and project B has an approximate ERR of 13 percent, which project is better if MARR=10 percent? O A The incremental ERR method is required to determine the better project. Neither A nor B is valid. B * For our purposes, a project is valid if its internal rate of return (IRR) is less than MARR. equal to or larger than MARR. less than 0 percent. larger than MARR.arrow_forwardAssume that you have two investment alternatives: the first project produces $125 for sure, and the second project produces $150 with probability 2/5. You can borrow $110 from your financial institution for one project (investment) if you show an asset as a collateral. Suppose that you maximize your expected profit, what would be the minimum level of collateral that make you select the safe project?arrow_forward
- If the WACC is changed to 5%, which of the following will occur? A. The NPV, the IRR and the MIRR will change B. The NPV and the IRR will change, but the MIRR will NOT change C. The NPV and the MIRR will change, but the IRR will NOT change D. The NPV, the IRR and the MIRR will all remain the same. A firm has a project with the following cash flows (in Millions). The WACC for the firm is 8.25%. Year 012 Cash Flows $ 45 SSS $ $ 3 $ 4 $ ss $ (325.00) 59.00 67.00 88.00 135.00 77.00arrow_forwardThe following information on two mutually exclusive projects is given below: Which of the following statements is correct?(a) Since the two projects have the same rate of return, they are indifferent.(b) Project A would be a better choice because the required investment is smaller with the same rate of return.(c) Project B would be a better choice as long as the investor's MARR is lessthan 25%.(d) Project Bis a better choice regardless of the investor's MARR.arrow_forwardSuppose you have to choose between two mutually exclusive investment projects with the following cash flows (all numbers are in $1,000s): [image attached] Both projects have a discount rate of 9%. Determine the Payback Period, Net Present Value (NPV) and the IRR for each project. Which is the better project based on NPV? And how can you use the IRR criterion to obtain the correct (i.e., value maximizing) project choice? t=0 t = 1 t = 2 Project A -$400 $250 $300 Project B -$200 $140 $179 Skip Extension Tip: Double click to open in new tabarrow_forward
- ZeeZee’s Construction Company has the opportunity to select one of four projects (A, B, C, or D) or the null (Do Nothing) alternative. Each project requires a single initial investment and has an internal rate of return as shown in the first table below. The second table shows the incremental IRR(s) for pairwise comparisons between each project and all other projects with a smaller initial investment. For each of the values of MARR below indicate which project is preferred based on an incremental IRR analysis. a. MARR = 50%. b. MARR = 41%. c. MARR = 25%.arrow_forwardWhich of the following projects would you feel safest in accepting? Assume the opportunity cost of capital is 12% for each project. ☐(a) “Project A” that has a small, but negative, NPV. ☐(b) “Project B” that has a positive NPV when discounted at 10%. ☐(c) “Project C” that has a cost of capital that exceeds its internal rate of return. ☐(d) “Project D” that has a zero NPV when discounted at 14%. darrow_forwardCummings Products is considering two mutually exclusive investments whose expected net cash flows are as follows: Construct NPV profiles for Projects A and B. What is each project’s IRR? If each project’s cost of capital were 10%, which project, if either, should be selected? If the cost of capital were 17%, what would be the proper choice? What is each project’s MIRR at the cost of capital of 10%? At 17%? (Hint: Consider Period 7 as the end of Project B’s life.) What is the crossover rate, and what is its significance?arrow_forward
- The net present value (NPV) method estimates how much a potential project will contribute to Business ethics/Shareholders Wealth/Employee Benefits, and it is the best selection criterion. The Smaller/Larger the NPV, the more value the project adds; and added value means a Higher/Larger stock price. In equation form, the NPV is defined as: CFt is the expected net cash flow at Time t, r is the project's risk-adjusted cost of capital, N is its life, and cash outflows are treated as negative cash flows. The NPV calculation assumes that cash inflows can be reinvested at the project's risk-adjusted RD/RS/WACC. When the firm is considering independent projects, if the project's NPV exceeds zero the firm should Accept/Reject the project. When the firm is considering mutually exclusive projects, the firm should accept the project with the Lowest Positive/Lowest Negative/Highest Postive/ Highest Negative NPV.Quantitative Problem: Bellinger Industries is considering two projects for inclusion…arrow_forwardYou are considering an investment in two normal cash flow and mutually exclusive projects. Project Apple has an internal rate of return of 13.6%, while Project Brewster has an internal rate of return of 15.75%. At a discount rate of 9.8% each project has the same net present value. If the appropriate weighted average cost of capital is 9.25%, which project(s), if any, should be adopted? Explain your decision.arrow_forwardA financial analyst is evaluating the following projects, which are mutually exclusive, meaning that only one of them can be chosen. Based on financial theory and the NPV criterion, which one of these projects should be chosen over the other three? Time A C D -26,000 -7,200 -14,500 -19,600 8,100 11,900 8,100 2,360 8.600 1,150 10,000 2,120 5,700 800 11,100 11,00O0 4,200 850 1,130 9,800 12,480 9,700 830 11,600 Discount 13.9% 13.9% 13.9% 13.9% Rate O Project A O Project B O Project C O Project D O12 345arrow_forward
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