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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Textbook Question
Chapter 5, Problem 1PS
Payback*
- a. What is the payback period on each of the following projects?
- b. Given that you wish to use the payback rule with a cutoff period of two years, which projects would you accept?
- c. If you use a cutoff period of three years, which projects would you accept?
- d. If the
opportunity cost of capital is 10%, which projects have positive NPVs? - e. “If a firm uses a single cutoff period for all projects, it is likely to accept too many short-lived projects.” True or false?
- f. If the firm uses the discounted-payback rule, will it accept any negative-
NPV projects? Will it turn down any positive-NPV projects?
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Students have asked these similar questions
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?
Alpesh
Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown below. The required rate of
return on projects of both of their risk class is 8 percent, and that the maximum allowable payback and discounted payback
statistic for the projects are 2 and 3 years, respectively.
Time
Project A Cash Flow
Project B Cash Flow
Use the payback decision rule to evaluate these projects, which one(s) should it be accepted or rejected?
Multiple Choice
0
-35,000
-45,000
1
25,000
25,000
2
45,000
5,000
3
16,000
65,000
Chapter 5 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 5 - (IRR) Check the IRRs for project F in Section 5-3.Ch. 5 - (IRR) What is the IRR of a project with the...Ch. 5 - (XIRR) What is the IRR of a project with the...Ch. 5 - Payback a. What is the payback period on each of...Ch. 5 - IRR Write down the equation defining a projects...Ch. 5 - Prob. 3PSCh. 5 - IRR rule You have the chance to participate in a...Ch. 5 - IRR rule Consider a project with the following...Ch. 5 - IRR rule Consider projects Alpha and Beta: The...Ch. 5 - Capital rationing Suppose you have the following...
Ch. 5 - Payback Consider the following projects: a. If the...Ch. 5 - Prob. 9PSCh. 5 - IRR Calculate the IRR (or IRRs) for the following...Ch. 5 - IRR rule Consider the following two mutually...Ch. 5 - IRR rule Mr. Cyrus Clops, the president of Giant...Ch. 5 - Prob. 13PSCh. 5 - Profitability index Look again at projects D and E...Ch. 5 - Prob. 15PSCh. 5 - Prob. 16PS
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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
- A firm evaluates all of its projects by applying the IRR rule. A project under consideration has the following cash flows: -$25,000 today (t=0); $11,000 after one year (t=1), 17,000 after two years (t=2); and 10,000 after three years (t=3). What is the Internal Rate of Return (“IRR”) for this project?arrow_forwardMf1.arrow_forwardA firm evaluates all of its projects by applying the IRR rule. A project under consideration has the following cash flows: Year Cash Flow 0 –$ 28,400 1 12,400 2 15,400 3 11,400 If the required return is 15 percent, what is the IRR for this project? Should the firm accept the project?arrow_forward
- A firm evaluates all of its projects by using the NPV decision rule. Year Cash Flow 0 −$ 28,000 1 24,000 2 13,000 3 6,000 a. At a required return of 28 percent, what is the NPV for this project? b. At a required return of 35 percent, what is the NPV for this project?arrow_forwardPayback period. Given the cash flow of four projects-A, B, C, and D-in the following table, , and using the payback period decision model, which projects do you accept and which projects do you reject if you have a 3-year cutoff period for recapturing the initial cash outflow? For payback period calculations, assume that the cash flow is equally distributed over the year. ..... What is the payback period for project A? years (Round to two decimal places.) Data table With a 3-year cutoff period for recapturing the initial cash outflow, project A would be What is the payback period for project B? (Click on the following icon in order to copy its contents into a spreadsheet.) years (Round to two decimal places.) rejected Cash Flow B D With a 3-year cutoff period for recapturing the initial cash outflow, project B would be Cost $10,000 $25,000 $45,000 $100,000 ассepted Cash flow year 1 $4,000 $2,000 $10,000 $40,000 What is the payback period for project C? Cash flow year 2 $4,000 $8,000…arrow_forwardWhich of the following projects would you feel safest in accepting? Assume the opportunity cost of capital is 12% for each project. ☐(a) “Project A” that has a small, but negative, NPV. ☐(b) “Project B” that has a positive NPV when discounted at 10%. ☐(c) “Project C” that has a cost of capital that exceeds its internal rate of return. ☐(d) “Project D” that has a zero NPV when discounted at 14%. darrow_forward
- a. Calculate the project's NPV at each of the following discount rates: 0%, 5%, 10%, 20%, 30%, 40%, 50%. b. What do the calculations tell you about this project's IRR? The IRR rule tells managers to invest if a project's IRR is greater than the cost of capital. If Acme Oscillators' cost of capital is 8%, should the company accept or reject this investment? c. Notice that this project's greatest NPVS come at very high discount rates. Can you provide an intuitive explanation for that pattern?arrow_forwardA. Estimate the free cash flow to the firm for each of the 4 years. B. Compute the payback (using free cash flows) period for investors in the firm. C. Compute the net present value and internal rate of return to investors in the firm.Would you accept the project? Why or why not? D. How will you incorporate this information in your existing analysis? Compute the newFCF side costs and benefits. Calculate the new NPV and IRR. Would you accept the project? Using A, B C with the first picture.arrow_forwardSuppose there are two potential projects for investment. Project 1 has a certain payoff of $50 in one year, while project 2 has a 50% chance of generating $100 in one year, and another 50% chance of generating $0 in one year. Suppose the company has an outstanding debt = $50. (1)Which project will shareholders prefer? Justify your answer. (2)Which project will debt holders prefer? Justify your answer. (3)Which project will the financial manager prefer? Justify your answer.arrow_forward
- Wallace Company is considering two projects. Their required rate of return is 10%. Which of the two projects, A or B, is better in terms of internal rate of return?arrow_forwardGiorgio Co. is looking at an investment project with an internal rate of return of 10.8%. The initial outlay for the investment is $90,000. The hurdle rate or minimum acceptable rate of return is 10.2%.arrow_forwardIf the WACC is changed to 5%, which of the following will occur? A. The NPV, the IRR and the MIRR will change B. The NPV and the IRR will change, but the MIRR will NOT change C. The NPV and the MIRR will change, but the IRR will NOT change D. The NPV, the IRR and the MIRR will all remain the same. A firm has a project with the following cash flows (in Millions). The WACC for the firm is 8.25%. Year 012 Cash Flows $ 45 SSS $ $ 3 $ 4 $ ss $ (325.00) 59.00 67.00 88.00 135.00 77.00arrow_forward
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