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 2, Problem 17PS
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Students have asked these similar questions
The internal rate of return (IRR) is the discount rate that results in a net present value
(NPV) of zero.
True
False
You are considering an investment that will cost $15,000 and generate returns of
$4,000 at the end of year 1, $5,000 at the end of year 2, $6,000 at the end of year 3
and $3,000 at the end of year 4.
Calculate the NPV of the investment using a cost of capital of j=7.0%. Round your
answer to the nearest dollar.
Your Answer:
You have an income of $4,000 in Period 0 and $0 in Period 1. Four different investment
opportunities have been given to you, which is summarized in the table below:
Project
Cost
Worth in Period 1
$1,620
$2,400
$1,040
$1,500
$2,000
$1,000
D
$700
$910
If the market interest rate is 11%, what is the optimal investment you can make? What would
your consumption be in Period 0 and Period 1 if you take on the optimal set of investments?
Chapter 2 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 2 - (FV) In 1880, five aboriginal trackers were each...Ch. 2 - Prob. 2SQCh. 2 - (PV) Your company can lease a truck for 10,000 a...Ch. 2 - (RATE) Ford Motor stock was one of the victims of...Ch. 2 - Prob. 5SQCh. 2 - Prob. 6SQCh. 2 - Prob. 8SQCh. 2 - (NOMINAL) What monthly compounded interest rate...Ch. 2 - Future values If you invest 100 at an interest...Ch. 2 - Discount factors If the PV of 139 is 125, what is...
Ch. 2 - Prob. 3PSCh. 2 - Prob. 4PSCh. 2 - Opportunity cost of capital Which of the following...Ch. 2 - Perpetuities An investment costs 1,548 and pays...Ch. 2 - Growing perpetuities A common stock will pay a...Ch. 2 - Prob. 8PSCh. 2 - Present values What is the PV of 100 received in:...Ch. 2 - Continuous compounding The continuously compounded...Ch. 2 - Compounding intervals You are quoted an interest...Ch. 2 - Future values and annuities a. The cost of a new...Ch. 2 - Prob. 13PSCh. 2 - Present values A factory costs 800,000. You reckon...Ch. 2 - Present values A machine costs 380,000 and is...Ch. 2 - Opportunity cost of capital Explain why we refer...Ch. 2 - Present values A factory costs 400,000. It will...Ch. 2 - Present values and opportunity cost of capital...Ch. 2 - Prob. 19PSCh. 2 - Prob. 20PSCh. 2 - Annuities David and Helen Zhang are saving to buy...Ch. 2 - Annuities Kangaroo Autos is offering free credit...Ch. 2 - Present values Recalculate the NPV of the office...Ch. 2 - Prob. 24PSCh. 2 - Prob. 25PSCh. 2 - Continuous compounding How much will you have at...Ch. 2 - Perpetuities You have just read an advertisement...Ch. 2 - Compounding intervals Which would you prefer? a....Ch. 2 - Compounding intervals A leasing contract calls for...Ch. 2 - Annuities Several years ago, The Wall Street...Ch. 2 - Prob. 31PSCh. 2 - Prob. 32PSCh. 2 - Prob. 33PSCh. 2 - Prob. 34PSCh. 2 - Prob. 35PSCh. 2 - Amortizing loans Suppose that you take out a...Ch. 2 - Prob. 37PSCh. 2 - Annuities Use Excel to construct your own set of...Ch. 2 - Declining perpetuities and annuities You own an...
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- Use the format in the figure below to perform a financial analysis. Create a spreadsheet to perform the analysis and show the NPV, ROI, and year in which payback occurs. + Perform a financial analysis for a project using the format provided in Figure 4-5. Assume that the projected costs and benefits for this project are spread over four years as fol- lows: Estimated costs are $200,000 in Year 1 and $30,000 each year in Years 2, 3, and 4. Estimated benefits are $0 in Year 1 and $100,000 each year in Years 2, 3, and 4. Use a 9 percent discount rate, and round the discount factors to two decimal places. Create a spreadsheet or use the business case financials template on the companion website to cal- culate and clearly display the NPV, ROI, and year in which payback occurs. In addition, write a paragraph explaining whether you would recommend investing in this project, based on your financial analysis. Discount rate 8% Assume the project is completed in Year 0 0 Costs Discount factor…arrow_forwardYou are considering an investment that will cost $15,000 and generate returns of $4,000 at the end of year 1, $5,000 at the end of year 2, $6,000 at the end of year 3 and $3,000 at the end of year 4. Calculate the NPV of the investment using a cost of capital of j1=6.0%. Round your answer to the nearest dollar. Your Answer: Answerarrow_forwardA project whose machinery and installation cost $15,000, promises a net stream of savings of $3,000 per year and has an expected life of 6 years. The companies required rate of return is 5%. What is the NPV of the project. What is the internal rate of return?arrow_forward
- A company that manufactures magnetic flow meters expects to undertake a project that will have the cash flows below. At an interest rate of 10% per year, what is the equivalent annual cost of the project? Find the AW value using (a) tabulated factors, (b) calculator functions, and (c) a spreadsheet. Which method did you find the easiest to use?arrow_forwardA business is considering a project which will cost them initially OMR 20,000. The sales expected for the two-year duration is OMR 20,000 per year. The variable costs are OMR 2,000 per year. Cost of capital is 10%. 1. Calculate the sensitivity of the project NPV to change in initial investment? 2. Calculate the sensitivity of the project NPV to change in expected sales?arrow_forwardIllustration: An investment opportunity costs $10,000 and returns $5,000, $4,000, and $3,000, respectively, the first three years. What is the internal rate of return (IRR)?arrow_forward
- Assume that it costs $1000 to start a project. If the project will give $400 profit in the first year, $500 in the second year and $300 in the third year. Find the pay back period. Now assume that the interest rate is 10%, find the net present value (NPV) and the profitability index (PI) for this projectarrow_forwardUse Excel’s NPV function for this problem. Riverside Inc. has an 8% cost of capital. The firm has an investment opportunity that costs $1,000. Riverside expects the investment to generate annual cash inflows $360 for each of the next three years. The net present value of the project (rounded to the nearest dollar) is Select one: a. $80. b. $72. c. ($72). d. ($80). Use Excel’s IRR function for this problem. Rancho Cucamonga has a 6% cost of capital. The firm has an investment opportunity that costs $2,000. Riverside expects the investment to generate annual cash inflows $600 for each of the next four years. The internal rate of return and Rancho’s decision are Select one: a. 7.7% and don’t invest in the project. b. 1.7% and don’t invest in the project. c. 1.7% and invest in the project. d. 7.7% and invest in the project. Whitelands Inc. bought equipment for $150. Whitelands estimated that the equipment would last ten years and used the double-declining balance method to depreciate it.…arrow_forwardAssume that it costs $1,000 to start a project. If the project will give $400 profit in the first year, $500 in the second year and $300 in the third year. find the payback period. Now assume that the interest rate is 10%, find the net present value (NPV) and the profitability index (PI) for this projectarrow_forward
- Can you answer these in Excel (and show any calculation formulas). See the attached image for the information. 1. What is the payack period, NPV, IRR? 2. What happens to the NPV and IRR if initial capital goes up 30%? 3. How much would the selling price have to increase to compensate for 30% in capital costs to the original level in 1.? 4. What is your recomendation?arrow_forwardYou have a project that has an initial cost of $675,000. It is expected to earn $82,000 annually for the indefinite future. Using a cumulative cashflow curve or the formula, calculate its simple breakeven point. If the simple breakeven were shorter, how would it affect your recommendation and why?arrow_forwardPlease complete the following in Excel and show work/formulas used (if used)arrow_forward
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