Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 7, Problem 24P
You have just started your summer Internship, and your boss asks you to review a recent analysis that was done to compare three alternative proposals to enhance the firm’s manufacturing facility. You find that the prior analysis ranked the proposals according to their
Suppose the appropriate cost or capital for each alternative is 10%. Using this information determine the NPV or each project. Which project should the firm choose?
Why is ranking the projects by their IRR not valid in this situation?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
You have just started your summer internship, and your boss asks you to review a recent analysis that was done to compare three alternative proposals to enhance the firm's manufacturing facility. You find that
the prior analysis ranked the proposals according to their IRR, and recommended the highest IRR option, Proposal A. You are concerned and decide to redo the analysis using NPV to determine whether this
recommendation was appropriate. But while you are confident the IRRS were computed correctly, it seems that some of the underlying data regarding the cash flows that were estimated for each proposal was not
included in the report. For Proposal B, you cannot find information regarding the total initial investment that was required in Year 0. And for Proposal C, you cannot find the data regarding additional salvage value
that will be recovered in Year 3. Here is the information you have (in $ millions): -
Suppose the appropriate cost of capital for each alternative is 10%. Using this…
You have just started your summer internship, and your boss asks you to review a recent analysis that was done to compare three alternative proposals to enhance
the firm's manufacturing facility. You find that the prior analysis ranked the proposals according to their IRR, and recommended the highest IRR option, Proposal A.
You are concerned and decide to redo the analysis using NPV to determine whether this recommendation was appropriate. But while you are confident the IRRS
were computed correctly, it seems that some of the underlying data regarding the cash flows that were estimated for each proposal was not included in the report.
For Proposal B, you cannot find information regarding the total initial investment that was required in Year 0. And for Proposal C, you cannot find the data regarding
additional salvage value that will be recovered in Year 3. Here is the information you have (in $ millions):
Proposal
Year 1
Year 2
с
IRR
60.0%
54.3%
53.6%
Year 0
- $100
$30
$0
$37
$153
$206…
I need the answer as soon as possible
Chapter 7 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 7.1 - Explain the NPV rule for stand-alone projects.Ch. 7.1 - What does the difference between the cost of...Ch. 7.2 - Prob. 1CCCh. 7.2 - If the IRR rule and the NPV rule lead to different...Ch. 7.3 - Can the payback rule reject projects that have...Ch. 7.3 - Prob. 2CCCh. 7.4 - For mutually exclusive projects, explain why...Ch. 7.4 - What is the incremental RR and what are its...Ch. 7.5 - Prob. 1CCCh. 7.5 - Prob. 2CC
Ch. 7 - Your brother wants to borrow 10,000 from you. He...Ch. 7 - You are considering investing in a start-up...Ch. 7 - You are considering opening a new plant. The plant...Ch. 7 - Your firm is considering the launch of a new...Ch. 7 - Bill Clinton reportedly was paid 15 million to...Ch. 7 - FastTrack Bikes, Inc. is thinking of developing a...Ch. 7 - OpenSeas, Inc. is evaluating the purchase of a new...Ch. 7 - You are CEO of Rivet Networks, maker of ultra-high...Ch. 7 - You are considering an investment in a clothes...Ch. 7 - You have been offered a very long term investment...Ch. 7 - You are considering opening a new plant. The plant...Ch. 7 - Bill Clinton reportedly was paid 15 million to...Ch. 7 - Prob. 13PCh. 7 - Innovation Company is thinking about marketing a...Ch. 7 - You have 3 projects with the following cash flows:...Ch. 7 - You own a coal mining company and are considering...Ch. 7 - Prob. 17PCh. 7 - Prob. 18PCh. 7 - Prob. 19PCh. 7 - Prob. 20PCh. 7 - You are a real estate agent thinking of placing a...Ch. 7 - Prob. 22PCh. 7 - You are deciding between two mutually exclusive...Ch. 7 - You have just started your summer Internship, and...Ch. 7 - Prob. 25PCh. 7 - Prob. 26PCh. 7 - Prob. 27PCh. 7 - Prob. 28PCh. 7 - Prob. 29PCh. 7 - Prob. 30PCh. 7 - Prob. 31PCh. 7 - Prob. 32PCh. 7 - Prob. 33PCh. 7 - Orchid Biotech Company is evaluating several...
Knowledge Booster
Learn more about
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
- Give two advantages and two disadvantages of using Net Present Value as an investment appraisal technique. Explain in no more than one sentence why each point you make is an advantage or disadvantage as if explaining to someone that has no understanding of the terminology or accounting jargon. The Graduate Recruitment Manager of WCITJ Ltd is interested in you as a potential summer intern and future employee. Like all employers, he is only impressed by students that are self motivated, that can communicate well, and those that research and read around their topics. He has asked you to explain, in one concise short paragraph each, three accounting concepts that you have read about during your initial study of accounting as part of your course.arrow_forwardImagine you are the project manager at an investment firm and given the task of preparing a report (essay) addressing several companies' projects' evaluations. Use the supplied information for each project to answer the associated questions. Your deliverable is a professionally prepared MS Excel file, MS Word report (essay) applying APA 7 formatting and a quick information sheet. In your recommendation/conclusion of your report identify the best project to invest in and give reasons why. The quick information sheet is this document with the blanks filled out for each question area. Harris Dance Company, Inc., a manufacturer of dance and exercise apparel, is considering replacing an existing piece of equipment with a more sophisticated machine. The following information is given. The firm pays 40 percent taxes on ordinary income and capital gains. Project 2 Questions: 1) Calculate the book value of the existing asset being replaced. 2) Calculate the tax effect from the sale…arrow_forwardYou have been hired as an external consultant to advise the management of a company on its investment projects. They will like your advice on which projects to take up; when to upgrade an existing equipment; and how to choose between equipment/processes of different quality (lifespan) or technology. They have a limited budget for these investmentsarrow_forward
- As a start-up company, Blue Enterprises encourages its employees to think through the entire value chain to estimate whether it might be worthwhile to take a risk on new products. As part of that program, Laura is reviewing a product concept that her intern presented to her. The basic idea is to use a common process, which would result in two intermediate products. One product could be sold right away (X). The other product (Y) would have no immediate sales value but after further processing would yield a very high- value product. Laura is intrigued enough to dig further into her intern's quantitative analysis, as follows. Sales value of X immediately after the joint process Sales value of Y after further processing Product X's share of the joint process cost Proportion of joint cost allocated to Product Y (a) Your answer is correct. $53,750 $406,000 $20,000 87.5% Based on this information, determine which joint cost allocation method the intern must have used when allocating the joint…arrow_forwardTo verify their calculations, Carrington and Genevieve have hired Josh Schlessman as a consultant. Josh was previously an equity analyst, and he has covered the HVAC industry. Josh has examined the company’s financial statements as well as those of its competitors. Although Ragan currently has a technological advantage, Josh’s research indicates that Ragan’s competitors are investigating other methods to improve efficiency. Given this, Josh believes that Ragan’s technological advantage will last for only the next five years. After that period, the company’s growth will likely slow to the industry average. Additionally, Josh believes that the required return the company uses is too high. He believes the industry average required return is more appropriate. Under Josh’s assumptions, what is the estimated stock price?arrow_forwardImagine that your firm is looking to replace its AIS application. The AIS application has been around for 10+ years. You are a member of the team that will select the new AIS application. There is discussion among the team that the new AIS should only focus on producing financial statements while other reports should be designed and developed by the internal IT team. What are the advantages and disadvantages of following this advice?arrow_forward
- As a start-up company, Oriole Enterprises encourages its employees to think through the entire value chain to estimate whether it might be worthwhile to take a risk on new products. As part of that program, Sharon is reviewing a product concept that her intern presented to her. The basic idea is to use a common process, which would result in two intermediate products. One product could be sold right away (X). The other product (Y) would have no immediate sales value but after further processing would yield a very high- value product. Sharon is intrigued enough to dig further into her intern's quantitative analysis, as follows. Sales value of X immediately after the joint process Sales value of Y after further processing Product X's share of the joint process cost Proportion of joint cost allocated to Product Y (a) Your answer is correct. (b) Based on this information, determine which joint cost allocation method the intern must have used when allocating the joint costs to these…arrow_forwardPlease answer in your own words After the pandemic ended, most of us are back to in-person work. However, the remote work and study format has a long-term impact on our society and economy. Also, with the introduction of AI-Generated Content like ChatGPT, our life and labor markets will change. Please discuss how the above one or two new norms will influence your investment decisions, such as which companies and/or industries will benefit from the change, and how you should change your investment strategy (i.e., investing in more stocks or bonds or real estate, investing in which companies, sectors, and industries).arrow_forwardYour client is investigating two start-up companies that operate in the same construction sector in Australia. These two companies are investigating similar projects (not both) in which they will invest. However, your client is not sure which is better and has sent the relevant details to you to advise. The characteristics of the two projects are given below: (picture) Your client wishes you to provide detailed calculations indicating which project you believe to be the best. The client will then decide whether to invest into the company looking to invest in the projectarrow_forward
- The Chief Information Officer (CIO) and the Managing Director (MD) of Illustrious Limited recently had the following conversation regarding the development of a new information system for the company: CIO: The way to go about the analysis is to first examine the old system, such as reviewing key documents and observing the workers performing their tasks. Then we can determine which aspects are working well and which should be preserved. MD: We have been through these types of projects before, and what always ends up happening is that we do not get the new system we are promised. Instead, we get a modified version of the old system. CIO: I can assure you that this will not happen this time. My team just wants a thorough understanding of what is working well and what is not. MD: I would feel much more comfortable if we first started with a list of our requirements. We should spend more time determining what exactly we want the system to do upfront. Then your team can come in and…arrow_forwardThe Chief Information Officer (CIO) and the Managing Director (MD) of Illustrious Limited recently had the following conversation regarding the development of a new information system for the company: CIO: The way to go about the analysis is to first examine the old system, such as reviewing key documents and observing the workers performing their tasks. Then we can determine which aspects are working well and which should be preserved. MD: We have been through these types of projects before, and what always ends up happening is that we do not get the new system we are promised. Instead, we get a modified version of the old system. CIO: I can assure you that this will not happen this time. My team just wants a thorough understanding of what is working well and what is not. MD: I would feel much more comfortable if we first started with a list of our requirements. We should spend more time determining what exactly we want the system to do upfront. Then your team can come in and…arrow_forwardThe Chief Information Officer (CIO) and the Managing Director (MD) of Illustrious Limited recently had the following conversation regarding the development of a new information system for the company: CIO: The way to go about the analysis is to first examine the old system, such as reviewing key documents and observing the workers performing their tasks. Then we can determine which aspects are working well and which should be preserved. MD: We have been through these types of projects before, and what always ends up happening is that we do not get the new system we are promised. Instead we get a modified version of the old system. CIO: I can assure you that will not happen this time. My team just want a thorough understanding of what is working well and what is not. MD: I would feel much more comfortable if we first started with a list of our requirements. We should spend more time in determining what exactly we want the system to do upfront. Then your team can come in and determine…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Essentials of Business Analytics (MindTap Course ...StatisticsISBN:9781305627734Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. AndersonPublisher:Cengage Learning
Essentials of Business Analytics (MindTap Course ...
Statistics
ISBN:9781305627734
Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Publisher:Cengage Learning
Relevant Costing Explained; Author: Kaplan UK;https://www.youtube.com/watch?v=hnsh3hlJAkI;License: Standard Youtube License