EBK CORPORATE FINANCE
4th Edition
ISBN: 8220103145947
Author: DeMarzo
Publisher: PEARSON
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Chapter 7, Problem 26P
Summary Introduction
To determine: The best project using the incremental
Introduction:
IRR helps to make capital-budget decisions. IRR relies on the
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Do the following problems. You must show your work.c) Find the IRR and MIRR of the following project and make your decision. Assume that the project's cost of capital (or WACC) is 4%.
Project X that costs $30 million is expected to generate $13m per year for 3 years. Is this project acceptable?
Assume you are the finance manager of Almanor Company, and the company is
considering investing in one of the three projects. The life for both the Projects X,
M and Project Y is 5 years. Project X costs OMR. 20500, Project M costs OMR.
20500 and Project Y costs OMR.20500. The discount rate/cost of capital is 4.15%.
Required: Use the following techniques to help company to decide which
Machine is better and justify why?
a)
Payback period
b)
Discount payback period
c)
Net Present Value
d)
Present value index -Profitability index.
Year
Project X
Project M
Project Y
7865
3748
8752
4567
7609
8393
3.
9676
4628
4508
7292
8905
7836
9904
0066
8287
(Ctrl) -
45
Where does the opportunity cost should go when calculating the NPV of the project?
is that in the CFO or at the beginning of the statement? because I'm not sure where it should be calculate when you calculate the NPV of the project.
meaning if I can open a restaurant on my parking spot and use all the area I'll generate 300 sales, but if I use just half of it I can rent it for 5K per year.
So how do I take into account this opportunity cost when calcuting NPV?
Chapter 7 Solutions
EBK CORPORATE FINANCE
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...
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- Consider the following projects, X and Y where the firm can only choose one. Project X costs $600 and has cash flows of $400 in each of the next 2 years. Project Y also costs $600, and generates cash flows of $500 and $275 for the next 2 years, respectively. Which investment should the firm choose if the cost of capital is 15 percent? Project X, since it has a higher NPV than Project Y Project Y, since it has a higher NPV than Project X neither, since both the projects have negative NPV neither, since both the projects have positive NPVarrow_forwardRicha is looking at the results of a Capital Investment Appraisal. The report shows that, assuming a Cost of Capital of 10%, investing in a plant to manufacture a new clothing line would give a positive NPV and an IRR of 23%. Should the company buy the machine? NPV is positive and IRRexceeds cost of capital. NPV is positive and IRR is less than cost of capital. NPV does not provide enough information. IRR is higher than the cost of capitalarrow_forwardYour company is deciding whether to purchase a high-quality printer for your office or one of lesser quality. The high-quality printer costs $45 000 and should last five years. The lesser quality printer costs $25 000 and should last two years. If the cost of capital for the company is 12 per cent, then what is the equivalent annual cost for the best choice for the company?arrow_forward
- Given a project with the following characteristics, answer the following questions: You are the project manager of a project to plant trees on the sidewalks of the local community. Your project is scheduled to last for 6 months. You are to plant (thirty) 30 trees each month. Each tree is planned to cost R1 000. It is now the last day of month 3. You have planted 80 trees and your CPI is 1.11. 1. What is the actual cost of the project right now? 2. What is the current schedule performance index (SPI) of the project? 3. How is the project currently performing in terms of budget and schedule? Motivate your answer. 4. What is the percentage of the project that is currently complete. What should be reported?arrow_forwardYou can only take one of the following two projects. You have no capital constraints and the cost of capital is 10%. The information below for each project includes the IRR and NPV. Project A: Costs 500 dollars today, pays 200 at t = 1 years from now, pays 250 at t = 2 years from today, and pays 300 at t = 3 years from today. The IRR is 21.65 %. The NPV is $113.82. Project B: Costs 750 dollars today, pays 300 at t = 1 years from now, pays 350 at t = 2 years from today, and pays 400 at t = 3 years from today. The IRR is 17.93%. The NPV is $112.51. According to our class notes, which project should be the best choice? a. Flip a coin b. Choose A c. Choose Barrow_forwardYou have been assigned to perform a project selection based on profitability index. You have collected data on the three project alternatives A1, A2, and A3 and your team has calculated the following (table) present worth equivalent for the benefits, costs, and investments at a social discount rate of 10%. The service life of each alternative is identical. (a) Find the PI(i) for each project alternative (b) Find the best alternative based on incremental PI(i) analysis (c) Why is the profitability index referred to as a measure of capital efficiency?arrow_forward
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