Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Textbook Question
Chapter 22.4, Problem 1CC
Why can a firm with no ongoing projects, and investment opportunities that currently have negative NPVs, still be worth a positive amount?
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Students have asked these similar questions
1) What is the company's WACC?
2) Should the company take the projects? Assume that the projects have the same risk as an average project for your firm.
3) If one project is depended on the other in a way that the company can only take both projects, should it take it?
Why do most academics and financial executives regard the NPV as being the single best criterion and better than the IRR? Why do companies still calculate IRRs?
If an investment project has a negative net present value (NPV), which one of the following statements about the internal rate of return (IRRT) of this project must be
true?
Select the correct response:
The IRR is negative.
The IRR is less than the company's weighted average cost of capital.
The IRR is equal to zero.
The IRR is greater than the company's weighted average cost of capital.
Chapter 22 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 22.1 - What is the difference between a real option and a...Ch. 22.1 - Why does a real option add value to an investment...Ch. 22.2 - Prob. 1CCCh. 22.2 - In what circumstances does the real option add...Ch. 22.2 - How do you use a decision tree to make the best...Ch. 22.3 - What is the economic trade-off between investing...Ch. 22.3 - Prob. 2CCCh. 22.3 - Does an option to invest have the same beta as the...Ch. 22.4 - Why can a firm with no ongoing projects, and...Ch. 22.4 - Why is it sometimes optimal to invest in stages?
Ch. 22.4 - How can an abandonment option add value to a...Ch. 22.5 - Prob. 1CCCh. 22.5 - Prob. 2CCCh. 22.6 - Why can staging investment decisions add value?Ch. 22.6 - How can you decide the order of investment in a...Ch. 22.7 - Prob. 1CCCh. 22.7 - Prob. 2CCCh. 22 - Your company is planning on opening an office in...Ch. 22 - You are trying to decide whether to make an...Ch. 22 - Prob. 4PCh. 22 - Prob. 5PCh. 22 - You are a financial analyst at Global Conglomerate...Ch. 22 - Prob. 7PCh. 22 - Prob. 8PCh. 22 - Consider again the electric car dealership in...Ch. 22 - Prob. 12PCh. 22 - Prob. 13PCh. 22 - You are an analyst working for Goldman Sachs, and...Ch. 22 - You own a small networking startup. You have just...Ch. 22 - An original silver dollar from the late eighteenth...Ch. 22 - What implicit assumption is made when managers use...Ch. 22 - Prob. 22PCh. 22 - Genenco is developing a new drug that will slow...Ch. 22 - Prob. 24PCh. 22 - Your firm is thinking of expanding. If you invest...Ch. 22 - Prob. 26PCh. 22 - Assume that the project in Example 22.5 pays an...
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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
- Which statements are INCORRECT? Check all that apply: when IRR is positive, the project is acceptable when profitability index is positive, the project is acceptable a decrease in a firm's WACC will increase the attractiveness of the firm's investment options when required return is less than internal rate of return, the project is acceptablearrow_forwardMany companies still go ahead to undertake capital projects even when these projects have a negative NPV. Why do you think this is so?arrow_forwardShould companies bid for a project with a price under the "project bid price"? No, this will not make financial sense. It depends on the project payback time. Yes, because they will still have positive profits.arrow_forward
- True / False and explain (if the statement is false, explain why it is incorrect) 1. Simulation analysts uses best- and worst case scenarios to determine the most likely outcome 2. In the absence of capital rationing, the firm should take all projects with a positive net present value.arrow_forwardWhich of the following is an example of a way in which companies can create value by exploiting real options? A.Exercising in-the-money real options immediately B.Optimally delaying or abadoning projects C.Abandoning good projects in favor of newer projects D.Acting quickly to take on the new projects even if there is no cost to waitarrow_forwardIf an investment project will positively affect the cash flows of other products the firm currently sells (increasing the flows), this is cannibalization and therefore should be counted in the investment project’s expected cash flows. tRUE OR FALSEarrow_forward
- Why is an investment more attractive to management if it has a shorter payback period?arrow_forwardWhich of the following statements is true? Group of answer choices a. Undertaking a negative NPV project may increase the value of a firmʹs equity while decreasing overall firm value b. In order to maximize firm value, management should commit to take on no projects that could decrease the value of the existing debt c. In order to maximize firm value, management should undertake all projects that will maximize the value of its equity d. Undertaking a positive NPV project will always increase the values of both the firmʹs debt and its equityarrow_forwardA firm would accept a project with a net present value of zero because Select one: a. the return on the project would be zero. b. the return on the project would be positive. c. the project would enhance the wealth of the firm's owners. d. the project would maintain the wealth of the firm's owners.arrow_forward
- Profitable projects are difficult to find. a. Efficient capital markets b. The curse of competitive markets c. Risk-return trade-off d. All risks are not equalarrow_forwardWhich of the following statements is most FALSE? A. If a project with normal cash flows has a positive NPV, it will definitely have an MIRR greater than the cost of capital. B. If a project with normal cash flows has an IRR that is greater than the cost of capital, then taking on that project would decrease the value of the firm. C. If a project has normal cash flows, then the MIRR has to be between k and IRR if the project has positive interim cash flows (cash flows between t=0 and the end of the project). D. If a project with normal cash flows does not have any interim cash flows, the project's IRR will equal the project's MIRR. E. Multiple IRRS can exist for a project if the project has nonnormal cash flows. OA OB OCarrow_forwardWhich of the following is a disadvantage of the IRR project evaluation method? Question 5Select one: a. It does not take into account the time value of money. b. If there are negative cash flows after positive cash flows, there may be zero or multiple internal rates of return. c. It does not make adequate allowance for risk. d. It focuses on accounting profit rather than cash flow as the source of value.arrow_forward
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