Bundle: Fundamentals of Financial Management, 14th + MindTap Finance, 1 term (6 months) Printed Access Card
14th Edition
ISBN: 9781305777118
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 12, Problem 17P
EQUIVALENT ANNUAL
| Time | Cash Flow X | Cash Flow Y |
| 0 | $100,000 | $70,000 |
| 1 | 30,000 | 30,000 |
| 2 | 50,000 | 30,000 |
| 3 | 70,000 | 30,000 |
| 4 | — | 30,000 |
| 5 | — | 10,000 |
Projects X and Y are equally risky and may be repeated indefinitely. If the firm’s WACC is 12%, what is the EAA of the project that adds the most value to the firm? (Round your final answer to the nearest whole dollar.)
Expert Solution & Answer
Trending nowThis is a popular solution!
Students have asked these similar questions
Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown below. The required rate of return on projects of both of their risk class is 8 percent, and that the maximum allowable
payback and discounted payback statistic for the projects are 2 and 3 years, respectively.
Time
1
2
3
Project A Cash Flow
Project B Cash Flow
-25,000
15,000
35,000
6,000
-35,000
15,000
25,000
55,000
Use the NPV decision rule to evaluate these projects; which one(s) should be accepted or rejected?
Multiple Choice
Accept A, reject B
Accept neither A nor B
Accept both A and B
Reject A, accept B
Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown below. The required rate of return on projects of both of their risk class is 10 percent, and that the maximum allowable payback and discounted payback statistic for the projects are 2 and 3 years, respectively.
Time
0
1
2
3
Project A Cash Flow
-22,000
12,000
32,000
3,000
Project B Cash Flow
-32,000
12,000
22,000
52,000
Use the PI decision rule to evaluate these projects; which one(s) should it be accepted or rejected?
Multiple Choice
A. Reject A, accept B
B. Accept both A and B
C. Accept neither A nor B
D. Accept A, reject B
Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown below. The required rate of return on projects of both of their risk class is 11 percent, and that the maximum allowable payback and discounted payback statistic for the projects are 2 and 3 years, respectively.
Time
0
1
2
3
Project A Cash Flow
-23,000
13,000
33,000
4,000
Project B Cash Flow
-33,000
13,000
23,000
53,000
Use the NPV decision rule to evaluate these projects; which one(s) should be accepted or rejected?
Chapter 12 Solutions
Bundle: Fundamentals of Financial Management, 14th + MindTap Finance, 1 term (6 months) Printed Access Card
Ch. 12 - Operating cash flows rather than accounting income...Ch. 12 - Explain why sunk costs should not be included in a...Ch. 12 - Explain why net operating working capital is...Ch. 12 - Why are interest charges not deducted when a...Ch. 12 - Prob. 5QCh. 12 - What are some differences in the analysis for a...Ch. 12 - Distinguish among beta (or market) risk,...Ch. 12 - Prob. 8QCh. 12 - Prob. 9QCh. 12 - If you were the CFO of a company that had to...
Ch. 12 - What is a "replacement chain"? When and how should...Ch. 12 - What is an "equivalent annual annuity (EAA)"? When...Ch. 12 - Suppose a firm is considering two mutually...Ch. 12 - REQUIRED INVESTMENT Truman Industries is...Ch. 12 - PROJECT CASH FLOW Eisenhower Communications is...Ch. 12 - AFTER-TAX SALVAGE VALUE Kennedy Air Services is...Ch. 12 - REPLACEMENT ANALYSIS The Chang Company is...Ch. 12 - EQUIVALENT ANNUAL ANNUITY Corcoran Consulting is...Ch. 12 - DEPRECIATION METHODS Kristin is evaluating a...Ch. 12 - SCENARIO ANALYSIS Huang Industries is considering...Ch. 12 - NEW PROJECT ANALYSIS You must evaluate the...Ch. 12 - NEW PROJECT ANALYSIS You must evaluate a proposal...Ch. 12 - REPLACEMENT ANALYSIS The Dauten Toy Corporation...Ch. 12 - REPLACEMENT ANALYSIS Mississippi River Shipyards...Ch. 12 - PROJECT RISK ANALYSIS The Butler-Perkins Company...Ch. 12 - UNEQUAL LIVES Haleys Graphic Designs Inc. is...Ch. 12 - UNEQUAL LIVES Cotner Clothes Inc. is considering...Ch. 12 - REPLACEMENT CHAIN Zappe Airlines is considering...Ch. 12 - REPLACEMENT CHAIN The Fernandez Company has an...Ch. 12 - EQUIVALENT ANNUAL ANNUITY A firm has two mutually...Ch. 12 - Prob. 18PCh. 12 - NEW PROJECT ANALYSIS Holmes Manufacturing is...Ch. 12 - REPLACEMENT ANALYSIS The Erley Equipment Company...Ch. 12 - REPLACEMENT ANALYSIS The Bigbee Bottling Company...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 10 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and a half and three and a half years, respectively. Time 0 1 2 3 Project A Cash Flow −1,000 300 400 700 Project B Cash Flow −500 200 400 300 Use the IRR decision rule to evaluate these projects; which one(s) should be accepted or rejected? Multiple Choice Accept A, reject B Accept both A and B Accept neither A nor B Reject A, accept Barrow_forwardA firm evaluates all of its projects by applying the IRR rule. A project under consideration has the following cash flows: Year Cash Flow -$ 27,600 11,600 14,600 10,600 1 2 If the required return is 18 percent, what is the IRR for this project? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) IRR % Should the firm accept the project? O No Yes eBook & Resources eBook: 9.5. The Internal Rate of Return Check my work 00arrow_forwardA firm evaluates all of its projects by applying the IRR rule. A project under consideration has the following cash flows: Year Cash Flow 0 $27,700 1 11,700 14,700 3 10,700 If the required return is 18 percent, what is the IRR for this project? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) IRR % Should the firm accept the project? Yes Noarrow_forward
- A firm evaluates all of its projects by applying the IRR rule. A project under consideration has the following cash flows: Year Cash Flow 0 –$ 28,600 1 12,600 2 15,600 3 11,600 If the required return is 14 percent, what is the IRR for this project? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Should the firm accept the project? Yes Noarrow_forwardYour firm has identified three potential investment projects. The projects and their cash flows are shown here: Cash Flow Today (millions) -$10 $5 $20 Cash Flow in One Year Project (millions) $20 $5 -$10 Suppose all cash flows are certain and the risk-free interest rate is 10%. a. What is the NPV of each project? b. If the firm can choose only one of these projects, which should it choose based on the NPV decision rule? c. If the firm can choose any two of these projects, which should it choose based on the NPV decision rule? ABCarrow_forwardA firm evaluates all of its projects by applying the IRR rule. A project under consideration has the following cash flows: Cash Flow -$41,000 20,000 23,000 14,000 Year 2. 3. If the required return is 14 percent, what is the IRR for this project? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) IRR Should the firm accept the project? О Аccept CO Rejectarrow_forward
- A firm has two mutually exclusive investment projects toevaluate. The projects have the following cash flows: Projects X and Y are equally risky and may be repeated indefinitely. If the firm’s WACC is10%, what is the EAA of the project that adds the most value to the firm? (Round your finalanswer to the nearest whole dollar.)arrow_forwardSuppose your firm is considering two independent projects with the cash flows shown below. The required rate of return on projects of both of their risk class is 9 percent, and that the maximum allowable payback and discounted payback statistic for the projects are 2 and 3 years, respectively. Time Project A Cash Flow Project B Cash Flow 0 -26,000 -96,000 1 2 3 16,000 16,000 36,000 7,000 26,000 56,000 Use the NPV decision rule to evaluate these projects; which one(s) should be accepted or rejected? Multiple Choice О Accept both A and B Reject A, accept Barrow_forwardYour firm has identified three potential investment projects. The projects and their cash flows are shown here: Project Cash Flow Today (millions) Cash Flow in One Year (millions) A −$13 $23 B $7 $3 C $25 -$15 Suppose all cash flows are certain and the risk-free interest rate is 6%. What is the NPV of each project? (Round to two decimal places.) If the firm can choose only one of these projects, which should it choose based on the NPV decision rule? (Round to two decimal places.) If the firm can choose any two of these projects, which should it choose based on the NPV decision rule? (Round to two decimal places.)arrow_forward
- A firm evaluates all of its projects by applying the IRR rule. A project under consideration has the following cash flows: Year Cash Flow 0 -$27,400 1 11,400 23 3 14,400 10,400 If the required return is 16 percent, what is the IRR for this project? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) IRR % Should the firm accept the project? ○ Yes ○ Noarrow_forwardA fim evaluates a project with the following cash flows. The firm has a 2 year payback period criteria and a required return of 11 percent. Year Cash flow |(OMR) -24,000 17,000 12,000 9,000 -8,000 11,000 2 3 4 5 11. What is the net present value for the project? 12. What is the payback period for the project? 13. What is the discounted payback period for the project? 14. What is the profitability index for the project? 15. Given your analysis, should the firm accept or reject the project?arrow_forwardCompute the payback statistic for Project X and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 9 percent and the maximum allowable payback is four years. Time: 0 1 2 3 4 5 Cash flow: −1,000 −75 100 100 0 2,000arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Principles of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College
Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College Pub
Financial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Principles of Accounting Volume 2
Accounting
ISBN:9781947172609
Author:OpenStax
Publisher:OpenStax College
Managerial Accounting
Accounting
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:South-Western College Pub
Financial And Managerial Accounting
Accounting
ISBN:9781337902663
Author:WARREN, Carl S.
Publisher:Cengage Learning,
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Capital Budgeting Introduction & Calculations Step-by-Step -PV, FV, NPV, IRR, Payback, Simple R of R; Author: Accounting Step by Step;https://www.youtube.com/watch?v=hyBw-NnAkHY;License: Standard Youtube License