Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
11th Edition
ISBN: 9780077861759
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 6, Problem 4QP
Calculating Project Cash Flow from Assets In the previous problem, suppose the project requires an initial investment in net working capital of $285,000 and the fixed asset will have a market value of $225,000 at the end of the project. What is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3? What is the new
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Students have asked these similar questions
a. What are the project’s annual net cash inflows?
b. What is the present value of the project’s annual net cash inflows? (Round your final answer to the nearest whole dollar amount.)
c. What is the project’s net present value? (Round final answer to the nearest whole dollar amount.)
d. What is the profitability index for this project? (Round your answer to 2 decimal places.)
e. What is the project’s internal rate of return? (Round your answer to nearest whole percent.)
Which 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.
$2.26
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 6 Solutions
Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 6 - Opportunity Cost In the context of capital...Ch. 6 - Prob. 2CQCh. 6 - Incremental Cash Flows Your company currently...Ch. 6 - Depreciation Given the choice, would a firm prefer...Ch. 6 - Prob. 5CQCh. 6 - Prob. 6CQCh. 6 - Equivalent Annual Cost When is EAC analysis...Ch. 6 - Prob. 8CQCh. 6 - Capital Budgeting Considerations A major college...Ch. 6 - To answer the next three questions, refer to the...
Ch. 6 - Prob. 11CQCh. 6 - To answer the next three questions, refer to the...Ch. 6 - Calculating Project NPV Flatte Restaurant is...Ch. 6 - Calculating Project NPV The Best Manufacturing...Ch. 6 - Calculating Project NPV Down Under Boomerang,...Ch. 6 - Calculating Project Cash Flow from Assets In the...Ch. 6 - Prob. 5QPCh. 6 - Project Evaluation Your firm is contemplating the...Ch. 6 - Project Evaluation Dog Up! Franks is looking at a...Ch. 6 - Prob. 8QPCh. 6 - Calculating NPV Howell Petroleum is considering a...Ch. 6 - Calculating EAC You are evaluating two different...Ch. 6 - Cost-Cutting Proposals Massey Machine Shop is...Ch. 6 - Prob. 12QPCh. 6 - Prob. 13QPCh. 6 - Comparing Mutually Exclusive Projects Vandalay...Ch. 6 - Capital Budgeting with Inflation Consider the...Ch. 6 - Prob. 16QPCh. 6 - Prob. 17QPCh. 6 - Cash flow Valuation Phillips Industries runs a...Ch. 6 - Equivalent Annual Cost Bridgton Golf Academy is...Ch. 6 - Prob. 20QPCh. 6 - Prob. 21QPCh. 6 - Prob. 22QPCh. 6 - Calculating Project NPV With the growing...Ch. 6 - Calculating Project NPV You have been hired as a...Ch. 6 - Calculating Project NPV Pilot Plus Pens is...Ch. 6 - EAC and Inflation Office Automation, Inc., must...Ch. 6 - Project Analysis and Inflation Dickinson Brothers,...Ch. 6 - Project Evaluation Aday Acoustics, Inc., projects...Ch. 6 - Calculating Required Savings A proposed...Ch. 6 - Calculating a Bid Price Another utilization of...Ch. 6 - Prob. 31QPCh. 6 - Prob. 32QPCh. 6 - Replacement Decisions Suppose we are thinking...Ch. 6 - Prob. 34QPCh. 6 - Project Analysis and Inflation The Biological...Ch. 6 - Prob. 36QPCh. 6 - Prob. 37QPCh. 6 - Prob. 38QPCh. 6 - Prob. 1MC1Ch. 6 - GOODWEEK TIRES, INC. After extensive research and...
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- Calculate the project cash flows for each year. Based on these cash flows and the average project cost of capital, what are the projects NPV, IRR, MIRR, PI, payback, and discounted payback? Do these indicators suggest that the project should be undertaken?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_forwardUse the following information to answer questions 11-15:A firm evaluates a project with the following cash flows. The firm has a 2 year payback period criteria and a required return of 11 percent. Year Cash flow (OMR) 0 -24,000 1 17,000 2 12,000 3 9,000 4 -8,000 5 11,000 11. What is the net present value for the project?12. What is the payback period for the project?13. What is the discounted payback period for the project?14. What is the profitability index for the project?15. Given your analysis, should the firm accept or reject the project?arrow_forward
- Use the following information to answer questions 11-15:A firm evaluates a project with the following cash flows. The firm has a 2 year payback period criteria and a required return of 11 percent.Year Cash flow (OMR)0 -24,0001 17,0002 12,0003 9,0004 -8,0005 11,00011. What is the net present value for the project?12. What is the payback period for the project?13. What is the discounted payback period for the project?14. What is the profitability index for the project?15. Given your analysis, should the firm accept or reject the project?16. You recently purchased a stock that is expected to earn 33 percent in a booming economy, 13 percent in a normal economy, and lose 40 percent in a recessionary economy. There is a 15 percent probability of a boom and a 60 percent chance of a normal economy. What is your expected rate of return on this stock?arrow_forwardWhat information does the payback period provide? Suppose you are evaluating a project with the expected future cash inflows shown in the following table. Your boss has asked you to calculate the project’s net present value (NPV). You don’t know the project’s initial cost, but you do know the project’s regular, or conventional, payback period is 2.50 years. Year Cash Flow Year 1 $350,000 Year 2 $500,000 Year 3 $450,000 Year 4 $425,000 If the project’s weighted average cost of capital (WACC) is 8%, the project’s NPV (rounded to the nearest dollar) is: $312,620 $295,253 $277,885 $347,356 Which of the following statements indicate a disadvantage of using the regular payback period (not the discounted payback period) for capital budgeting decisions? Check all that apply. The payback period is calculated using net income instead of cash flows. The payback period does not take the project’s entire life into account.…arrow_forwardA firm evaluates all of its projects by applying the IRR rule. A project under consideration has the following cash flows: Year Cash Flow 0 –$ 28,400 1 12,400 2 15,400 3 11,400 If the required return is 15 percent, what is the IRR for this project? Should the firm accept the project?arrow_forward
- What 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_forwardAASBC is considering a project that has the following cash flow stream. Year 3 Cash Flows 0 -$10,000 1 $4,000 2 $3,500 $3,800 a. Calculate the project's IRR. b. What is the project's payback period? c. If the project's cost of capital is equal to 10%, should AASBC accept the project?arrow_forwardA project has the following cash flows: Year 0: 74000 Year 1: -49000 Year 2: -41000 What is the IRR for this project? If the required return is 12%, should the firm accept the project? What is the NPV of this project? What is the NPV of the project if the required return is 0%? 24%? What is going on here? Explain your answerarrow_forward
- Investment Criteria. Consider the following information. Expected Net Cash Flows Year Project X 0 ($10,000) 1 6,500 2 3,500 3 3,000 4 1,000 Assume the discount rate is 10 percent. Calculate Project X’s discounted payback period. Should the project be accepted Calculate the profitability index. Should the project be accepted? Calculate the accounting rate of return. Should the project be accepted?arrow_forwardConsider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) -$ 15,456 5,225 8,223 13,013 8,705 0 1 234 -$ 276,363 26,400 51,000 57,000 402,000 Whichever project you choose, if any, you require a 6 percent return on your investment. a. What is the payback period for Project A? Payback period b. What is the payback period for Project B? Payback period c. What is the discounted payback period for Project A? Discounted payback periodarrow_forwardThe NPV and payback period What information does the payback period provide? Suppose you are evaluating a project with the expected future cash inflows shown in the following table. Your boss has asked you to calculate the project’s net present value (NPV). You don’t know the project’s initial cost, but you do know the project’s regular, or conventional, payback period is 2.50 years. Year Cash Flow Year 1 $325,000 Year 2 $450,000 Year 3 $475,000 Year 4 $425,000 Q1. If the project’s weighted average cost of capital (WACC) is 8%, the project’s NPV (rounded to the nearest dollar) is: a. $381,870 b. $363,686 c. $327,317 d. $309,133 Q2. Which of the following statements indicate a disadvantage of using the regular payback period (not the discounted payback period) for capital budgeting decisions? Check all that apply. a. The payback period is calculated using net income instead of cash flows. b. The payback…arrow_forward
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