Corporate Finance
3rd Edition
ISBN: 9780132992473
Author: Jonathan Berk, Peter DeMarzo
Publisher: Prentice Hall
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Question
Chapter 7.5, Problem 1CC
Summary Introduction
To explain: Why ranking projects according to
Introduction:
NPV helps to make capital budget decisions. It would choose an alternative or an investment to increase the value of an enterprise. Using NPV, the net benefit of an organization can be calculated by subtracting the
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Explain the concept of sensitivity analysis as determined by NPV Breakeven sensitivity. How is it measured and what insights does it provide about the risk of a project?
Goal seek can be used to evaluate the NPV breakeven of an input. What needs to happen next in order to evaluate and interpret the results? How do we know whether the results suggest that an input adds a little, or a lot, of risk relative to a project?
Explain the term Flaws in Project Ranking by IRR?
How do simulation analysis and scenario analysis differ in the way theytreat very bad and very good outcomes? What does this imply about usingeach technique to evaluate project riskiness?
Chapter 7 Solutions
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 - Prob. 5PCh. 7 - FastTrack Bikes, Inc. is thinking of developing a...Ch. 7 - OpenSeas, Inc. is evaluating the purchase of a new...Ch. 7 - Prob. 8PCh. 7 - Prob. 9PCh. 7 - Prob. 10PCh. 7 - Prob. 11PCh. 7 - Prob. 12PCh. 7 - Prob. 13PCh. 7 - Prob. 14PCh. 7 - Prob. 15PCh. 7 - Prob. 16PCh. 7 - Prob. 17PCh. 7 - Prob. 18PCh. 7 - Prob. 19PCh. 7 - Prob. 20PCh. 7 - Prob. 21PCh. 7 - Prob. 23PCh. 7 - Prob. 24PCh. 7 - Prob. 25PCh. 7 - Prob. 26PCh. 7 - Prob. 27PCh. 7 - Prob. 28PCh. 7 - Prob. 29PCh. 7 - Prob. 30PCh. 7 - Prob. 31P
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- When you assign the highest anticipated sales and price and the lowest anticipated costs to a project, you are analyzing the project under the condition known as: base-case scenario analysis best-case sensitivity analysis worst-case sensitivity analysis best-case scenario analysis worst-case scenario analysisarrow_forwardWhy is there conflict between the NPV and IRR criteria between projects Y and Z? Which is typically considered the best decision criteria to use and why?arrow_forwardWhat are some of the difficulties that might occur with the application of an IRR approach in project analysis. Why do they occur? What can you do to avoid the IRR problems. Explain fully.arrow_forward
- Explain the decision rules of NPV, IRR, and BCR. Which one you think is important for project evaluation (explain with examples)?arrow_forwardPayback is best used to evaluate which types of projectarrow_forwardHow do you apply the Net Present Value rule when multiple projects are available and you have the added constraint of accepting only one project?arrow_forward
- Sensitivity analysis is the analysis of the effect of parameter changes on the optimal solution. Cite an example where this sensitive analysis could be applicable.arrow_forwardThe analysis of the effect that a single variable has on the net present value of a project is called _____ analysis. Group of answer choices variable erosion sensitivity scenario cost-benefitarrow_forwardHow should firms evaluate projects with different risks?arrow_forward
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