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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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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Assume an investor deposits $116,000 in a professionally managed account. One year later, the account has grown in value to $136,000 and the investor withdraws $43,000. At the end of the second year, the account value is $107,000. No other additions or withdrawals were made. During the same two years, the risk-free rate remained constant at 3.94 percent and a relevant benchmark earned 9.58 percent the first year and 6.00 percent the second. Calculate geometric average of holding period returns over two years. (You need to calculate IRR of cash flows over two years.)
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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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