a.
Adequate information:
Year | Cash Flows |
0 | $8,700 |
1 | -$3,900 |
2 | -$2,900 |
3 | -$2,300 |
4 | -$1,800 |
To compute: The
Introduction: Internal rate of return (IRR) is defined as the discount rate at which the aggregate
b.
Adequate information:
Year | Cash Flows |
0 | $8,700 |
1 | -$3,900 |
2 | -$2,900 |
3 | -$2,300 |
4 | -$1,800 |
Appropriate discount rate = 10%
To determine: Whether the offer should be accepted if the appropriate discount rate is 10%.
Introduction: Internal rate of return refers to the discount rate at which the
c.
Adequate information:
Year | Cash Flows |
0 | $8,700 |
1 | -$3,900 |
2 | -$2,900 |
3 | -$2,300 |
4 | -$1,800 |
Appropriate discount rate = 20%
To compute: Whether the offer should be accepted if the appropriate discount rate is 20%.
Introduction: Internal rate of return refers to the discount rate at which the net present value of the project is zero.
d.
Adequate information:
Year | Cash Flows |
0 | $8,700 |
1 | -$3,900 |
2 | -$2,900 |
3 | -$2,300 |
4 | -$1,800 |
To compute:
- The net present value (NPV) of the offer if the appropriate discount rate is 10%.
- The net present value (NPV) of the offer if the appropriate discount rate is 20%.
Introduction: Net present value is defined as the summation of the present value of cash inflows in each period minus the summation of the present value of
e.
Adequate information:
Year | Cash Flows |
0 | $8,700 |
1 | -$3,900 |
2 | -$2,900 |
3 | -$2,300 |
4 | -$1,800 |
To explain: Whether the decisions under the NPV rule are consistent with those of the IRR rule.
Introduction:
The Internal Rate of Return (IRR) is the discount rate that will equate the present value of the cash inflows to the present value of the cash outflows.
The Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows of a proposal.

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Chapter 5 Solutions
CORPORATE FINANCE (LL+CONNECT)
- King’s Park, Trinidad is owned and operated by a private company,Windy Sports Ltd. You work as the Facilities Manager of the Park andthe CEO of the company has asked you to evaluate whether Windy shouldembark on the expansion of the facility given there are plans by theGovernment to host next cricket championship.The project seeks to increase the number of seats by building fournew box seating areas for VIPs and an additional 5,000 seats for thegeneral public. Each box seating area is expected to generate $400,000in incremental annual revenue, while each of the new seats for thegeneral public will generate $2,500 in incremental annual revenue.The incremental expenses associated with the new boxes and seatingwill amount to 60 percent of the revenues. These expenses includehiring additional personnel to handle concessions, ushering, andsecurity. The new construction will cost $15 million and will be fullydepreciated (to a value of zero dollars) on a straight-line basis overthe 5-year…arrow_forwardYou are called in as a financial analyst to appraise the bonds of Ollie’s Walking Stick Stores. The $5,000 par value bonds have a quoted annual interest rate of 8 percent, which is paid semiannually. The yield to maturity on the bonds is 12 percent annual interest. There are 12 years to maturity. a. Compute the price of the bonds based on semiannual analysis. b. With 8 years to maturity, if yield to maturity goes down substantially to 6 percent, what will be the new price of the bonds?arrow_forwardLonnie is considering an investment in the Cat Food Industries. The $10,000 par value bonds have a quoted annual interest rate of 12 percent and the interest is paid semiannually. The yield to maturity on the bonds is 14 percent annual interest. There are seven years to maturity. Compute the price of the bonds based on semiannual analysis.arrow_forward
- Essentials of Business Analytics (MindTap Course ...StatisticsISBN:9781305627734Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. AndersonPublisher:Cengage Learning
