Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 18, Problem 23PS
Agency costs The possible payoffs from Ms. Ketchup’s projects (see Example 18.1) have not changed but there is now a 40% chance that project 2 will pay off $24 and a 60% chance that it will pay off $0.
- a. Recalculate the expected payoffs to the bank and Ms. Ketchup if the bank lends the
present value of $10. Which project would Ms. Ketchup undertake? - b. What is the maximum amount the bank could lend that would induce Ms. Ketchup to take project 1?
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7. The NPV and payback period
What information does the payback period provide?
Suppose Omni Consumer Products's CFO is evaluating a project with the following cash inflows. She does not know the project's initial cost;
however, she does know that the project's regular payback period is 2.5 years.
Year
Cash Flow
Year 1
$375,000
Year 2
$500,000
Year 3
$400,000
Year 4
$425,000
If the project's weighted average cost of capital (WACC) is 9%, what is its NPV?
O $239,865
O $299,831
O $344,806
O $269,848
Which of the following statements indicate a disadvantage of using the discounted payback period for capital budgeting decisions? Check all that
аpply.
O The discounted payback period is calculated using net income instead of cash flows.
O The discounted payback period does not take the time value of money into account.
O The discounted payback period does not take the project's entire life into account.
None
The NPV and payback period
What information does the payback period provide?
Suppose ABC Telecom Inc.’s CFO is evaluating a project with the following cash inflows. She does not know the project’s initial cost; however, she does know that the project’s regular payback period is 2.5 years.
Year
Cash Flow
Year 1
$350,000
Year 2
$500,000
Year 3
$500,000
Year 4
$400,000
If the project’s weighted average cost of capital (WACC) is 10%, what is its NPV?
$280,268
$224,214
$252,241
$322,308
Which of the following statements indicate a disadvantage of using the discounted payback period for capital budgeting decisions? Check all that apply.
The discounted payback period does not take the project’s entire life into account.
The discounted payback period is calculated using net income instead of cash flows.
The discounted payback period does not take the time value of money into account.
Chapter 18 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 18 - Prob. 1PSCh. 18 - Tax shields Here are book and market value balance...Ch. 18 - Prob. 3PSCh. 18 - Tax shields The firm cant use interest tax shields...Ch. 18 - Financial distress This question tests your...Ch. 18 - Prob. 6PSCh. 18 - Prob. 7PSCh. 18 - Debt ratios Rajan and Zingales identified four...Ch. 18 - Prob. 9PSCh. 18 - Pecking-order theory Fill in the blanks: According...
Ch. 18 - Financial slack For what kinds of companies is...Ch. 18 - Tax shields Compute the present value of interest...Ch. 18 - Tax shields Suppose that Congress sets the top...Ch. 18 - Tax shields The trouble with MMs argument is that...Ch. 18 - Tax shields Look back at the Johnson Johnson...Ch. 18 - Agency costs Let us go back to Circular Files...Ch. 18 - Agency costs The Salad Oil Storage (SOS) Company...Ch. 18 - Prob. 20PSCh. 18 - Agency costs The possible payoffs from Ms....Ch. 18 - Leverage targets Some corporations debtequity...Ch. 18 - Prob. 25PSCh. 18 - Trade-off theory The trade-off theory relies on...
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- Need help throughout this problem pleasearrow_forward7. The NPV and payback period What information does the payback period provide? Suppose Praxis Corporation's CFO is evaluating a project with the following cash inflows. She does not know the project's initial cost; however, she does know that the project's regular payback period is 2.5 years. Year Cash Flow Year 1 $350,000 Year 2 $475,000 Year 3 $475,000 Year 4 $400,000 If the project's weighted average cost of capital (WACC) is 10%, what is its NPV? $278,324 $333,989 $292,240 $236,575 Which of the following statements indicate a disadvantage of using the discounted payback period for capital budgeting decisions? Check all that apply. ☐ The discounted payback period does not take the project's entire life into account. The discounted payback period does not take the time value of money into account. The discounted payback period is calculated using net income instead of cash flows. ☐arrow_forwardYou are choosing between two projects. The cash flows for the projects are given in the following table ($ million): Project Year 0 Year 1 Year 2 Year 3 Year 4 A −$51 $25 $19 $19 $17 B −$98 $19 $40 $51 $60 a. What are the IRRs of the two projects? b. If your discount rate is 4.8%, what are the NPVs of the two projects? c. Why do IRR and NPV rank the two projects differently?arrow_forward
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