Intermediate Financial Management (MindTap Course List)
12th Edition
ISBN: 9781285850030
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Question
Chapter 8, Problem 7MC
Summary Introduction
Case summary:
A mid-sized human resources management company considering the expansion plans including acquisition of Company T which is an employment agency supplies computer programmers and word processors to businesses. Company also considering the purchase of Company B (privately held company)
To determine: Percentage of value due to cash flows beyond year 4 and beyond.
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Students have asked these similar questions
17. Consider the following two mutually exclusive projects:
Year Cash Flow (A) Cash Flow (B)0 −$291,000 −$41,6001 37,000 20,0002 55,000 17,6003 55,000 17,2004 366,000 14,000
a) What is the Internal Rate of Return (IRR) for each of these projects? b) Using the IRR decision rule, which project should the company accept? c) If the required return is 11 percent, what is the Net Present Value (NV) for each of these projects? d) Using the NPV decision rule, which project should the company accept? e) Why do you think the NPV and IRR rules do not agree on same project approval/rejection direction?
12. The ABC Company is considering undertaking an investment that promises to have the following cash flows: period 0, −$50; period 1, $90. If the firm waits a year, it can invest in an alternative (that is, mutually exclusive) investment that promises to pay −$60 in period 1 and $100 in period 2. Assume a time value of money of 0.05.
Which investment should the firm undertake? Use the net present value and the internal rate of return methods.
Consider the following two mutually exclusive projects:
Year Cash Flow (A) Cash Flow (B)
0 −$29,000 −$29000
1 14,400 4,300
2 12,300 9,800
3 9,200 15,200
4 5,100 16,800
a) What is the Internal Rate of Return (IRR) for each of these projects?
b) Using the IRR decision rule, which project should the company accept?
c) If the required return is 11 percent, what is the Net Present Value (NV) for each of these projects?
d) Using the NPV decision rule, which project should the company accept?
e) Why do you think the NPV and IRR rules do not agree on same project approval/rejection direction?
Chapter 8 Solutions
Intermediate Financial Management (MindTap Course List)
Ch. 8 - Define each of the following terms: a. Proxy;...Ch. 8 - Two investors are evaluating General Electric’s...Ch. 8 - A bond that pays interest forever and has no...Ch. 8 - Explain how to use the free cash flow valuation...Ch. 8 - Thress Industries just paid a dividend of 1.50 a...Ch. 8 - Prob. 2PCh. 8 - Prob. 3PCh. 8 - Prob. 4PCh. 8 - A company currently pays a dividend of $2 per...Ch. 8 - EMC Corporation has never paid a dividend. Its...
Ch. 8 - Prob. 7PCh. 8 - Prob. 8PCh. 8 - Constant Growth Valuation Crisp Cookwares common...Ch. 8 - Prob. 10PCh. 8 - Brushy Mountain Mining Companys coal reserves are...Ch. 8 - Prob. 12PCh. 8 - Nonconstant Growth Stock Valuation Simpkins...Ch. 8 - Prob. 14PCh. 8 - Return on Common Stock
You buy a share of The...Ch. 8 - Prob. 16PCh. 8 - Value of Operations
Kendra Enterprises has never...Ch. 8 - Free Cash Flow Valuation
Dozier Corporation is a...Ch. 8 - Prob. 19PCh. 8 - Prob. 20PCh. 8 - Prob. 1MCCh. 8 - Prob. 2MCCh. 8 - Prob. 3MCCh. 8 - Prob. 4MCCh. 8 - Use B&M’s data and the free cash flow valuation...Ch. 8 - Prob. 6MCCh. 8 - Prob. 7MCCh. 8 - Prob. 8MCCh. 8 - Prob. 9MCCh. 8 - Prob. 10MCCh. 8 - Prob. 11MCCh. 8 - Prob. 13MCCh. 8 - (1) Write out a formula that can be used to value...Ch. 8 - Assume that Temp Force has a beta coefficient of...Ch. 8 - Prob. 16MCCh. 8 - Now assume that the stock is currently selling at...Ch. 8 - Prob. 19MCCh. 8 - Prob. 20MCCh. 8 - Prob. 21MC
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- Consider the cash flows for the investment projects given in Table. Assume that the MARR = 10%. (a) Suppose A, B, and C are mutually exclusive projects. Which project would be selected on the basis of the IRR criterion? (b) Assume that projects C and E are mutually exclusive. Using the IRR criterion, which Project would you select?. Net Cash Flow B D. E -4,850 2,100 2,100 2,500 4,250 3,200 2,850 800 300 4,250 4,250 2,850 2,900 1,050 500 -835 -835 -835 -835 1,500 3.250 1,600 1,200 2,100 2,100arrow_forwardWhat is the project’s internal rate of return? Round your answer to two decimal places. % For the press brake project, at what annual rates of return do the net present value and internal rate of return methods assume that the net cash inflows are being reinvested? Round your answers to two decimal places. The net present value calculation assumes the net cash flows are reinvested at %. The internal rate of return calculation assumes the net cash flows are reinvested at %.arrow_forwardConsider the cash flows for the investment projects given in Table. Assume that the MARR = 10%. (a) Suppose A, B, and C are mutually exclusive projects. Which project would be selected on the basis of the IRR criterion (b) Assume that projects C and È are mutually exclusive. Using the IRR criterion, which Project would you select? Net Cash Flow A В C D E -4,250 3,200 2,850 -4,250 1,500 3,250 1,600 1,200 -4,250 2,850 -4,850 2,100 2,100 2,100 2,100 2,500 1 -835 2,900 1,050 500 2 -835 3 800 -835 4 300 -835arrow_forward
- In using the two-step approach to Enterprise Valuation (EV), where EV = the Present Value of Planning Period Cash Flows (PVPPCF) + the Present Value of Terminal Value at the end of the Planning Period (PVTV), the PVTV calculation can be based on: a. Level annual cash flows discounted as a perpetuity. b. The Gordon Growth Model. c. An EBITDA multiple. d. All of the above. e. None of the above.arrow_forwardConsider the cash flows of the following investment projects (MARR = 15%): (a) Assume that A and B are mutually exclusive projects. Which project is selected according to the AE criteria? (b) Suppose B and C are mutually exclusive projects. Which project is selected according to the AE criteria?arrow_forwardConsider the following project: Period 0 1 2 3 Net cash flow −205 0 89.55 238.89 The internal rate of return is 19%. The NPV, assuming a 19% opportunity cost of capital, is exactly zero. Calculate the expected economic income and economic depreciation in each year. (Negative answers should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.)arrow_forward
- A firm evaluates all of its projects by applying the IRR rule. A project under consideration has the following cash flows: Year Cash Flow O 1 2 3 $28,900 12,900 15,900 11,900 If the required return is 14 percent, what is the IRR for this project? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) IRR % Should the firm accept the project? No Yesarrow_forwardConsider the following two mutually exclusive projects: Year Cash Flow (X) Cash Flow (Y) 0 -$ 15,900 -$ 15,900 6,710 7,290 23 7,290 7,730 3,630 4,810 a. What is the IRR of Project X? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. b. What is the IRR of Project Y? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. c. What is the crossover rate for these two projects? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. a. IRR b. IRR % % c. Crossover rate %arrow_forwardWhich of the following comes closest to the net present value (NPV) of a project whose initial investment is $5 and which produces two cash flows: the first at the end of year 2 of $3 and the second at the end of year 4 of $7? The required rate of return is 13%? Select one: a. $1.84 b. $0 c. $1.64 d. $2.05 e. $2.26arrow_forward
- 13. The IBC Company is considering undertaking an investment that promises to have the following cash flows Period 0 is = -$100 Period 1 is= $150 Period 2 is = $50 Period 3 is = $50 If it waits a year, it can invest in an alternative (that is, mutually exclusive) investment that promises to pay Period 1 Period 2 Period 3 −$150 $250 $50 Assume a time value of money of 0.05. Which investment should the firm undertake? Use the present value method and the internal rate of return approaches. With the IRR approach, use the incremental cash flows.arrow_forwardB and Carrow_forwardTwo mutually exclusive investment projects have the following forecasted cash flows: a. Compute the internal rate of return for each project. b. Compute the net presnt value for each project if the firm has a 10 percent cost of capital. c. Which project should be adopted? Why? Year A B 0 -$20000 -$20000 1 +10000 0 2 +10000 0 3 +10000 0 4 +10000 +60000arrow_forward
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