CORPORATE FINANCE
CORPORATE FINANCE
12th Edition
ISBN: 9781307702804
Author: Ross
Publisher: MCG/CREATE
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Chapter 7, Problem 14QAP
Summary Introduction

To calculate: Payback period, NPV, and IRR

Introduction: The term "payback time" refers to the number of years needed to recoup the initial monetary outlay. The difference between the current value of cash inflows and withdrawals over a period of time is known as net present value (NPV). The term internal rate of return (IRR) is a discount rate where all cash flows' net present values (NPV) to zero.

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Scenario one: Under what circumstances would it be appropriate for a firm to use different cost of capital for its different operating divisions? If the overall firm WACC was used as the hurdle rate for all divisions, would the riskier division or the more conservative divisions tend to get most of the investment projects? Why? If you were to try to estimate the appropriate cost of capital for different divisions, what problems might you encounter? What are two techniques you could use to develop a rough estimate for each division’s cost of capital?
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