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 6, Problem 16PS
Project
- a. Calculate project NPV for each company.
- b. What is the IRR of the after-tax cash flows for each company? Why are the IRRs for A and B the same?
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*A project costs $298 at t = 0 and generates unlevered after-tax cash flows of $53 per year forever. The project's unlevered cost of capital is 11.9%. The initial cost of the project is paid for with a
combination of debt and equity. Debt contributes $87 and will earn interest at 4.8% forever. (The debt is perpetual, it never matures. Assume the debt tax shield cash flows have the same risk profile
as the debt cash flows. The debt is fairly priced. All of the project NPV accrues to the equity holders.) The tax rate is 15% . What is the WACC of the levered project? Give your answer in percentage
to the nearest 0.1 % . correct answer: 11.6
16. A three-year project requires an initial investment of £100,000 and will
produce positive net operating cash flows of £40,000, £35,000 and
£45,000 in years 1, 2 and 3. The investment has no residual value at
the end of the project.
The company uses a 10% discount rate and does not currently pay
tax. The NPV has been calculated as - £4,690 (i.e. negative).
What is the sensitivity of the project decision to changes in the cost of
the investment?
(a) 0%
(b) 4.7%
(c) 21.3%
(d) 95.3%
A project costs $334 at t = 0 and generates unlevered after - tax cash flows of $51 per year forever. The project's unlevered cost of capital is 9.1%. The initial cost of the project is paid for with a combination of debt and equity. Debt contributes $72 and will earn interest at 5.4% forever. (The debt is perpetual, it never matures. Assume the debt tax shield cash flows have the same risk profile as the debt cash flows. The debt is fairly priced. All of the project NPV accrues to the equity holders.) The tax rate is 27%. What is the WACC of the levered project? Give your answer in percentage to the nearest 0.1%.
Chapter 6 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 6 - Cash flows Which of the following should be...Ch. 6 - Real and nominal flows Mr. Art Deco will be paid...Ch. 6 - Cash flows True or false? a. A projects...Ch. 6 - Depreciation How does the PV of depreciation tax...Ch. 6 - Working capital The following table tracks the...Ch. 6 - Prob. 6PSCh. 6 - Prob. 7PSCh. 6 - Mutually exclusive investments and project lives...Ch. 6 - Replacement decisions Machine C was purchased five...Ch. 6 - Prob. 10PS
Ch. 6 - Prob. 12PSCh. 6 - Working capital Each of the following statements...Ch. 6 - Depreciation Ms. T. Potts, the treasurer of Ideal...Ch. 6 - Project NPV and IRR A project requires an initial...Ch. 6 - Project NPV A widget manufacturer currently...Ch. 6 - Project NPV Marsha Jones has bought a used...Ch. 6 - Project NPV United Pigpen is considering a...Ch. 6 - Project NPV Hindustan Motors has been producing...Ch. 6 - Equivalent annual cash flows As a result of...Ch. 6 - Prob. 25PSCh. 6 - Replacement decisions Hayden Inc. has a number of...Ch. 6 - Prob. 27PSCh. 6 - Prob. 28PSCh. 6 - Prob. 29PSCh. 6 - Prob. 30PSCh. 6 - The cost of excess capacity The presidents...Ch. 6 - Effective tax rates One measure of the effective...Ch. 6 - Equivalent annual costs We warned that equivalent...
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- ABC Pty. has identified an opportunity in the market. The project requires an investment of R15726 in year 0 and no residual value after 3 years. Estimated future cash flows for the project are shown below in Rand. The company's required rate of return is 100*0.197%. Taxation can be ignored. Year 1 ***** 2 ***** 3 ***** Project 1 Rand Income: 12914*** 12914*** 13 000*** What is the discounted payback of the project at the required rate of return? Interpolate to find the year fraction, i.e. 1 year and 9 months will be 1.7500. Write your answer including four decimal places.arrow_forwardS (Comprehensive problem) Traid Winds Corporation, a firm in the 34 percent marginal tax bracket with a required rate of return or cost of capital of 15 percent, is considering a new project. This project involves the introduction of a new product. The project is expected to last 5 years and then, because this is somewhat of a fad product, be terminated. Given the information in the popup window, , determine the free cash flows associated with the project, the project's net present value, the profitability index, and the internal rate of return. Apply the appropriate decision criteria. a. What is the initial outlay associated with this project? $ (Round to the nearest dollar.) Get more help. Data table (...) Cost of new plant and equipment Shipping and installation costs Unit sales Sales price per unit Variable cost per unit Annual fixed costs Working-capital requirements Depreciation method $14,800,000 $200,000 YEAR 1 2 3 4 5 UNITS SOLD 70,000 120,000 120,000 80,000 70,000 $300/unit…arrow_forward3. (Ignore income taxes in this problem.) ABC Co. is considering an investment opportunity having cash flows as described below: Project III would require a cash outlay of $10,000 now and would provide a cash inflow of $30,000 eight years from now. Required: If ABC Co. has a required rate of return of 14%, determine if the project is acceptable. Use the NPV method.arrow_forward
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Profitability index; Author: The Finance Storyteller;https://www.youtube.com/watch?v=Md5ocNqKHq8;License: Standard Youtube License