CORPORATE FINANCE (LL+CONNECT)
CORPORATE FINANCE (LL+CONNECT)
12th Edition
ISBN: 9781266427404
Author: Ross
Publisher: MCG CUSTOM
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Chapter 5, Problem 10QAP

a.

Summary Introduction

Adequate information:

    YearCash Flows
    0$8,700
    1-$3,900
    2-$2,900
    3-$2,300
    4-$1,800

To compute: The internal rate of return (IRR) of the offer.

Introduction: Internal rate of return (IRR) is defined as the discount rate at which the aggregate present value of net cash inflows is equal to the aggregate present value of net cash outflows of the project.

b.

Summary Introduction

Adequate information:

    YearCash 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 net present value of the project is zero.

c.

Summary Introduction

Adequate information:

    YearCash 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.

Summary Introduction

Adequate information:

    YearCash 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 cash outflow.

e.

Summary Introduction

Adequate information:

    YearCash 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)

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