Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Question
Chapter 9, Problem 9.2CTF
Summary Introduction
To discuss: The drawback of the payback method of project analysis.
Introduction:
Capital budgeting is the procedure of allocating money to projects that are worthy. The main aim is to increase the wealth of the shareholders.
Payback method:
The payback period is one of the capital budgeting techniques, which refers to the number of periods needed to get back the actual investment in a project.
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14. Marginal analysis means that projects must be implemented if their revenues are higher than their expenses.
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Why is it important to make the distinction between company required rate of return (WACC) and project required
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Format B IU x, x² L
EX
4
Q
11
!!
3
Your firm is contemplating the purchase of a new $1,683,500 computer-based order
entry system. The system will be depreciated straight-line to zero over its 5-year life. It
will be worth $163,800 at the end of that time. You will be able to reduce working capital
by $227,500 (this is a one-time reduction). The tax rate is 23 percent and your required
return on the project is 17 percent and your pretax cost savings are $636,550 per year.
a. What is the NPV of this project?
NPV
b. What is the NPV if the pretax cost savings are $458,300 per year?
NPV
Chapter 9 Solutions
Fundamentals of Corporate Finance
Ch. 9.1 - Prob. 9.1ACQCh. 9.1 - Prob. 9.1BCQCh. 9.2 - Prob. 9.2ACQCh. 9.2 - Why do we say that the payback period is, in a...Ch. 9.3 - Prob. 9.3ACQCh. 9.3 - What advantage(s) does the discounted payback have...Ch. 9.4 - What is an average accounting rate of return...Ch. 9.4 - What are the weaknesses of the AAR rule?Ch. 9.5 - Prob. 9.5ACQCh. 9.5 - Is it generally true that an advantage of the IRR...
Ch. 9.6 - What does the profitability index measure?Ch. 9.6 - How would you state the profitability index rule?Ch. 9.7 - Prob. 9.7ACQCh. 9.7 - If NPV is conceptually the best procedure for...Ch. 9 - Prob. 9.1CTFCh. 9 - Prob. 9.2CTFCh. 9 - Prob. 9.3CTFCh. 9 - Prob. 9.4CTFCh. 9 - What is a benefitcost ratio?Ch. 9 - Prob. 9.7CTFCh. 9 - Prob. 1CRCTCh. 9 - Net Present Value [LO1] Suppose a project has...Ch. 9 - Prob. 3CRCTCh. 9 - Prob. 4CRCTCh. 9 - Prob. 5CRCTCh. 9 - Net Present Value [LO1] Concerning NPV: a....Ch. 9 - Prob. 7CRCTCh. 9 - Profitability Index [LO7] Concerning the...Ch. 9 - Payback and Internal Rate of Return [LO2, 5] A...Ch. 9 - Prob. 10CRCTCh. 9 - Capital Budgeting Problems [LO1] What difficulties...Ch. 9 - Prob. 12CRCTCh. 9 - Modified Internal Rate of Return [LO6] One of the...Ch. 9 - Net Present Value [LO1] It is sometimes stated...Ch. 9 - Internal Rate of Return [LO5] It is sometimes...Ch. 9 - Calculating Payback [LO2] What is the payback...Ch. 9 - Calculating Payback [LO2] An investment project...Ch. 9 - Calculating Payback [LO2] Siva, Inc., imposes a...Ch. 9 - Calculating Discounted Payback [LO3] An investment...Ch. 9 - Calculating Discounted Payback [LO3] An investment...Ch. 9 - Calculating AAR [LO4] Youre trying to determine...Ch. 9 - Calculating IRR [LO5] A firm evaluates all of its...Ch. 9 - Calculating NPV [LO1] For the cash flows in the...Ch. 9 - Calculating NPV and IRR [LO1, 5] A project that...Ch. 9 - Calculating IRR [LO5] What is the IRR of the...Ch. 9 - Prob. 11QPCh. 9 - NPV versus IRR [LO1, 5] Garage, Inc., has...Ch. 9 - Prob. 13QPCh. 9 - Problems with IRR [LO5] Light Sweet Petroleum,...Ch. 9 - Prob. 15QPCh. 9 - Problems with Profitability Index [LO1, 7] The...Ch. 9 - Comparing Investment Criteria [LO1, 2, 3, 5, 7]...Ch. 9 - NPV and Discount Rates [LO1] An investment has an...Ch. 9 - MIRR [L06] RAK Corp. is evaluating a project with...Ch. 9 - Prob. 20QPCh. 9 - Prob. 21QPCh. 9 - Cash Flow Intuition [LO1, 2] A project has an...Ch. 9 - Payback and NPV [LO1, 2] An investment under...Ch. 9 - Prob. 24QPCh. 9 - NPV Valuation [LO1] The Yurdone Corporation wants...Ch. 9 - Problems with IRR [LO5] A project has the...Ch. 9 - Problems with IRR [LO5] McKeekin Corp. has a...Ch. 9 - Prob. 28QPCh. 9 - Prob. 1MCh. 9 - Prob. 2MCh. 9 - Bullock Gold Mining Seth Bullock, the owner of...
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Similar questions
- Question 4 (4 points) ◄ Listen The IRR of normal Project X is greater than the IRR of normal Project Y, and both IRRs are greater than zero. Also, the NPV of X is greater than the NPV of Y at the cost of capital. If the two projects are mutually exclusive, Project X should definitely be selected, and the investment made, provided we have confidence in the data. Put another way, it is impossible to draw NPV profiles that would suggest not accepting Project X. True Falsearrow_forwardThe ________ the coefficient of variation, the ________ the project attractiveness.arrow_forwardSpecs Co is a manufacturer of spectacles and contact lenses. It is evaluating four projects for investment purposes. The projects are being evaluated based on their profitability, which is dependent on market conditions. Market conditions are forecast to be either good, average or poor and the probability of those market conditions occurring are 50%, 30% and 20% respectively. Specs Co has prepared the following profit table: Market conditions Good Average Poor Project 1 $160,000 $80,000 $10,000 Project 1 Project 2 Project 3 Project 4 Project 2 Project 4 $150,000 $130,000 $100,000 $70,000 $20,000 ($20,000) ($30,000) The profitability of the projects has been calculated after deducting directly attributable fixed costs as follows: Fixed costs $500,000 $400,000 $250,000 $200,000 Project 3 $140,000 $60,000 Specs Co has also recently employed a trainee management accountant who has been asking the finance director about how expected values can be used by an organisation.arrow_forward
- 8- Explain with a hypothetical numbers when the Internal Rate of Return (IRR) compared to the Net Present Value (NPV) is not a good measure to accept or reject a project.arrow_forwardState whether the following statement true or false and provide a brief explanationarrow_forward11. Explain what a sunk cost is, what an opportunity cost is, and how each cost should be handled when doing project analysis. Give an example of each type of cost.arrow_forward
- The advantage(s) of the discounted payback method over the payback method of project analysis include:I. ease of use II. liquidity bias III. arbitrary cutoff point IV. the consideration of time value of money V. works well for research and development projects Multiple Choice I, II, III, IV and V III and V only IV only I, II, III and V only III onlyarrow_forwardQuestion 5: Find the net present value, interpret whether the NPV suggests you should accept or reject the project, find the payback period, find the discounted payback period, find the profitability index, interpret whether the profitability index suggests you should accept or reject the project, find the internal rate of return, explain whether the internal rate of return can repay the cost of borrowing money to conduct the project, find the modified internal rate of return, and explain with the modified internal rate of return can repay the cost of borrowing money to conduct the project. All for the following situation: The initial capital outlay is $175,000, the first-year annual operating cash flow is projected to be 20,000 but should grow by 5% per year during each of the project's 30 years, the after-tax-salvage cash flow is guessed to be $500,000, the required rate of return on this project is 15.50% and the company weighted average cost of capital is 12.50%.arrow_forwardEngineering Economicsarrow_forward
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