Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
11th Edition
ISBN: 9780077861759
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Chapter 5, Problem 8CQ
Summary Introduction
To determine: Whether the given statement is true or not and whether NPV of Project B is twice as great as that of project A or not for any discount rate in between 0 to 20%.
Payback Period:
The payback period is the period in which the company earns back their investment. It is used to determine whether to take this project or not.
Net present value refers to the present value of all the future cash flow that is adjusted according to the
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Students have asked these similar questions
Net Present Value The investment in project A is $1 million, and the investment in project B is $2 million. Both projects have a unique internal rate of return of 20 percent. Is the following statement true or false? For any discount rate from zero percent to 20 percent, project B has an NPV twice as great as that of project A . Explain your answer
Suppose you have to choose between two mutually exclusive investment projects with the following
cash flows (all numbers are in $1,000s):
[image attached]
Both projects have a discount rate of 9%. Determine the Payback Period, Net Present Value (NPV)
and the IRR for each project. Which is the better project based on NPV? And how can you use the
IRR criterion to obtain the correct (i.e., value maximizing) project choice?
t=0
t = 1
t = 2
Project A
-$400
$250
$300
Project B
-$200
$140
$179
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2. An investment has an installed cost of $412,670. The cash flows over the four-year life of the investment
are projected to be $212,817, $153,408, $102,389, and $72,308. If the discount rate is zero, what is the
NPV? If the discount rate is infinite, what is the NPV? At what discount rate is the NPV just equal
to zero? Sketch the NPV profile for this investment based on these three points.
Chapter 5 Solutions
Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 5 - Payback Period and Net Present Value If a project...Ch. 5 - Net Present Value Suppose a project has...Ch. 5 - Comparing Investment Criteria Define each of the...Ch. 5 - Payback and Internal Rate of Return A project has...Ch. 5 - International Investment Projects In March 2014,...Ch. 5 - Capital Budgeting Problems What are some of the...Ch. 5 - Prob. 7CQCh. 5 - Prob. 8CQCh. 5 - Net Present Value versus Profitability Index...Ch. 5 - Internal Rate of Return Projects A and B have the...
Ch. 5 - Net Present Value You are evaluating Project A and...Ch. 5 - Modified Internal Rate of Return One of the less...Ch. 5 - Net Present Value It is sometimes stated that the...Ch. 5 - Prob. 14CQCh. 5 - Calculating Payback Period and NPV Maxwell...Ch. 5 - Calculating Payback An investment project provides...Ch. 5 - Calculating Discounted Payback An investment...Ch. 5 - Calculating Discounted Payback An investment...Ch. 5 - Prob. 5QPCh. 5 - Calculating IRR Compute the internal rate of...Ch. 5 - Calculating Profitability Index Bill plans to open...Ch. 5 - Calculating Profitability Index Suppose the...Ch. 5 - Cash Flow Intuition A project has an initial cost...Ch. 5 - Prob. 10QPCh. 5 - NPV versus IRR Consider the following cash flows...Ch. 5 - Problems with Profitability Index The Coris...Ch. 5 - Prob. 13QPCh. 5 - Comparing Investment Criteria Wii Brothers, a game...Ch. 5 - Profitability Index versus NPV Hanmi Group, a...Ch. 5 - Comparing Investment Criteria Consider the...Ch. 5 - Comparing Investment Criteria The treasurer of...Ch. 5 - Comparing Investment Criteria Consider the...Ch. 5 - Prob. 19QPCh. 5 - NPV and Multiple IRRs You are evaluating a project...Ch. 5 - Payback and NPV An investment under consideration...Ch. 5 - Multiple IRRs This problem is useful for testing...Ch. 5 - NPV Valuation The Yurdone Corporation wants to set...Ch. 5 - Calculating IRR The Utah Mining Corporation is set...Ch. 5 - Prob. 25QPCh. 5 - Calculating IRR Consider two streams of cash...Ch. 5 - Calculating Incremental Cash Flows Darin Clay, the...Ch. 5 - Prob. 28QPCh. 5 - Prob. 1MCCh. 5 - Seth Bullock, the owner of Bullock Gold Mining, is...
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- An investment has an installed cost of $532,800. The cash flows over the four-year life of the investment are projected to be $216,850, $233,450, $200,110, and $148,820, respectively. a. If the discount rate is zero, what is the NPV? (Do not round intermediate calculations.) b. If the discount rate is infinite, what is the NPV? (A negative answer should be indicated by a minus sign.) c. At what discount rate is the NPV just equal to zero? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. NPV b. NPV c. IRR Q % larrow_forwardPlease answer all questions a,b and c with explanations. Should each discount be accepted or rejected. Thxarrow_forwardIf the cash flows for Project M are C0 = -1,000; C1 = +800; C2 = +700 and C3= -200. Calculate the IRR for the project. For what range of discount rates does the project have a positive NPV?arrow_forward
- An investment has an installed cost of $537,800. The cash flows over the four-year life of the investment are projected to be $212,750, $229,350, $196,010, and $144,720, respectively. a. If the discount rate is zero, what is the NPV? (Do not round intermediate calculations.) b. If the discount rate is infinite, what is the NPV? (A negative answer should be indicated by a minus sign.) c. At what discount rate is the NPV just equal to zero? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. NPV b. NPV c. IRR %arrow_forwardMansukhbhaiarrow_forwardPlease see attached:arrow_forward
- 3) could you use the Figure below that shows the net present value profile of two projects Y and W to answer the following questions: What is the internal rate of return on project Y? Determine the “approximate” discount rate at which you would be indifferent between the two projects Find the “approximate” net present value of project W when the discount rate is 4%.arrow_forwardProject A has an IRR of 14% and NPV of $8,000 while project B has an IRR of 17% and an NPV of $5,000. Which project should you do if the projects are mutually exclusive, and the discount rate is 9%? a. A O b. B O c. Both A and B d. You should calculate profitability index. O e. Neither A nor B because both decision rules give contradictory recommendations.arrow_forwardProject Analysis. Assume that you are evaluating the following three mutually exclusive projects: A. Complete the following analyses. (For the last two lines, Terminal Value, please write in the dollar amount of the terminal value.) B. Compare and explain the conflicting rankings of the NPVs and TRRs versus the IRRs. C. Using different discount rates, is it possible to get different rankings within the NPV calculation? Why or why not? D. If 10 percent is the required return, which project is preferred? E. Which is the fairer representation of these two projects, TRR or IRR? Why?arrow_forward
- Which 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_forwardExplain how the internal rate of return and net present value are related. If a project has an NPV of $50,000 using a 10 percent discount factor, what does this imply about that project's IRR?arrow_forwardPlease see attached:arrow_forward
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