PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 10, Problem 13PS
a.
Summary Introduction
To discuss: Whether the break-even level of cash flow of the sales is greater or lesser than zero break-even point.
b
Summary Introduction
To discuss: Whether the
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You have determined the profitability of a planned project by finding the present value of all the cash flows from that project. Which of the following would cause the project to look more appealing in terms of the present value of those cash flows?
A. The discount rate increases.
B. The cash flows are extended over a longer period of time, but the total amount of the cash flows remains the same.
C. The discount rate decreases.
D. Answers B and C above.
E. Answers A and B above.
Which one of the following statements is correct?
The net present value is a measure of profits expressed in today's dollars.
The net present value is positive when the required return exceeds the internal rate of return.
If the initial cost of a project is increased, the net present value of that project will also increase
Net present value is equal to an investment's cash inflows discounted to today's dollars.
Assume a project has normal cash flows. All else equal, which of the following statements is CORRECT?
A. A project's IRR increases as the WACC declines.
B. A project's MIRR is unaffected by changes in the WACC.
C. A project's regular payback increases as the WACC declines.
D. A project's discounted payback increases as the WACC declines.
E. A project's NPV increases as the WACC declines.
Chapter 10 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 10 - Terminology Match each of the following terms to...Ch. 10 - Project analysis True or false? a. Sensitivity...Ch. 10 - Sensitivity analysis Otobais staff (see Section...Ch. 10 - Prob. 4PSCh. 10 - Prob. 7PSCh. 10 - Scenario analysis What is the NPV of the electric...Ch. 10 - Prob. 9PSCh. 10 - Break-even analysis Break-even calculations are...Ch. 10 - Prob. 11PSCh. 10 - Prob. 12PS
Ch. 10 - Prob. 13PSCh. 10 - Break-even analysis A financial analyst has...Ch. 10 - Fixed and variable costs In a slow year, Deutsche...Ch. 10 - Operating leverage You estimate that your cattle...Ch. 10 - Prob. 17PSCh. 10 - Prob. 20PSCh. 10 - Real options Explain why options to expand or...Ch. 10 - Prob. 22PSCh. 10 - Real options True or false? a. Decision trees can...Ch. 10 - Prob. 24PSCh. 10 - Real options An auto plant that costs 100 million...Ch. 10 - Decision trees Look back at the Vegetron electric...Ch. 10 - Prob. 27PSCh. 10 - Prob. 28PSCh. 10 - Prob. 29PSCh. 10 - Prob. 32PS
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- 6.Calculate the project's Modified Internal Rate of Return (MIRR). What critical assumption does the MIRR make that differentiates it from the IRR? TIP : look for the definition of Modified Internal Rate of Return, and then do it in excel, easy !!! Year Net Cash flow Future Value of Net Cash flow 0 -$20.8 example 1 $4.5 $7.97 (n=6, i=10%)=fv(.1,6,,4.5) 2 $6.3 (n=5, i=10%) 3 $5.2 (n=4, i=10%) 4 $3.9 (n=3, i=10%) 5 $2.1 (n=2, i=10%) 6 $1.3 (n=1, i=10%) 7 $0.5 (n=0, i=10%) Sum = $XX.XX MIRR = ( in excel ) Rate ( 7,-20.8, xx.xx) 7.Where does the value of MIRR fall relative to the discount rate and IRR?arrow_forwardYou have determined the profitability of a planned project by finding the present value of all the cash flows from that project. Which of the following would cause-the project to look less appealing in terms of the present value of those cash flows? O The discount rate decreases. The cash flows are extended over a longer period of time, but the total amount remains the same. O The discount rate increases. O Statements B and C are correct. O Statements A and B are correct.arrow_forwardIf a project has a positive net present value, then which of the following statements are correct? I. The present value of all cash inflows must equal the costs of the project. The IRR is equal to the required rate of return. II. A increase in the project's initial cost will cause the project to have a higher positive NPV. III. Any delay in receiving the projected cash inflows will cause the project to have a higher positive NPV. IV. IRR must equal zero. Only II Only III All None of themarrow_forward
- Assume a project has a discounted payback that equals the project's life. The project's sales quantity must be at which one of these break-even points? Select one: O a. Accounting O b. Leveraged O c. Marginal O d. Cash Oe. Financialarrow_forwardWhat refers to the interest rate at which the present work of the cash flow on a project is zero of the interest earned by an investment? Select one: a. Return of investment b. Yield c. Rate of return d. Economic returnarrow_forward18. In a situation such as Acron's, where a one-time cost is followed by a sequence of cash flows, the internal rate of return (IRR) is the discount rate that makes the NPV equal to 0. The idea is that if the discount rate is greater than the IRR, the company will not pursue the project, but if the discount rate is less than the IRR, the project is financially attractive. a. Use Excel's Goal Seek tool to find the IRR for the Acron model. b. Excel also has an IRR function. Look it up in online help to see how it works, and then use it on Acron's model. Of course, you should get the same IRR as in part a. c. Verify that the NPV is negative when the discount rate is slightly greater than the IRR, and that it is positive when the discount rate is slightly less thanarrow_forward
- Which one of the following statements is correct concerning the payback rule? a. The payback period is computed using the present value of each of the cash flows. b. The rule says that you should accept a project if the payback period is greater than 1.0. c. The rule is biased in favour of long-term projects. d. The rule is flawed because it ignores all cash flows after some arbitrary point in time.arrow_forwardCalculate the payback period, net present value, and internal rate of return for Project A. Assume a discount rate of 10%. Should the firm accept or reject Project A? Explain. If Project A and Project B are mutually exclusive, which is the better choice? Explain. What are “non-conventional” cash flows? What issues arise when evaluating projects with “non-conventional” cash flows? Project A Project B Year Cash Flow Year Cash Flow 0 -$100,000 0 -$1 1 $70,000 1 $0 2 $0 2 $0 3 $50,000 3 $10arrow_forwardAn investment has an installed cost of $532,800. The cash flows over the four-year life of the investment are projected to be $216,850, $233,450, $200,110, and $148,820, respectively. a. If the discount rate is zero, what is the NPV? (Do not round intermediate calculations.) b. If the discount rate is infinite, what is the NPV? (A negative answer should be indicated by a minus sign.) c. At what discount rate is the NPV just equal to zero? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. NPV b. NPV c. IRR Q % larrow_forward
- which of the following statement is true>? 1. return on equity is the ratio of total assets to total net income 2. one must know the discount rate to compute the npv of a project but one can compute the IRR without referring to the discount rate. 3. there will always be one IRR regardless of cash flows 4. one must know the discount rate to compute the IRR of a project but one can compute the NPV without referring to the discount rate 5. payback accounts for time value of moneyarrow_forwardprocess shows how the present value of any sum to be received in the future decreases and approaches o as the years to receipt increases, and the present value declines faster at higher v interest rates. The fundamental goal of financial management is to maximize the firm's value, and the value of any asset is the present v value of its expected future cash flows. One can solve for either the interest rate or the number of periods using the FV and the PV equations. The easiest way to solve for these variables is with a financial calculator or a spreadsheet. Quantitative Problem 1: You deposit $1,800 into an account that pays 7% per year. Your plan is to withdraw this amount at the end of 5 years to use for a down payment on a new car. How much will you be able to withdraw at the end of 5 years? Do not round intermediate calculations. Round your answer to the nearest cent. $4 Quantitative Problem 2: Today, you invest a lump sum amount in an equity fund that provides an 12% annual…arrow_forwardWhat is the 'golden rule' for finding the Internal Rate of Return (IRR) of an investment project cash flow? a)Vary the discount rate until the net present value of the cash flow equals zero. b)Vary the discount rate until the net present value of the cash flow is positive c)Vary the discount rate to the point of maximum increase in the net present value d)Vary the discount rate until the net present value of the cash is negativearrow_forward
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