Concept explainers
a)
To determine: The
Introduction:
IRR helps to make capital-budget decisions. IRR relies on the
b)
To determine: The
Introduction:
IRR helps to make capital-budget decisions. IRR relies on the cash inflows and outflows of the project, instead of external data. The project should be accepted if the IRR of the project exceeds a hurdle rate.
c)
To determine: The cashflow under the lease contract and the IRR of Company C.
Introduction:
IRR helps to make capital-budget decisions. IRR relies on the cash inflows and outflows of the project, instead of external data. The project should be accepted if the IRR of the project exceeds a hurdle rate.
d)
To determine: Whether the new bid of Company C is better than the original bid.
Introduction:
IRR helps to make capital-budget decisions. IRR relies on the cash inflows and outflows of the project, instead of external data. The project should be accepted if the IRR of the project exceeds a hurdle rate.
Want to see the full answer?
Check out a sample textbook solutionChapter 7 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
- Net present values for three alternative Investment projects follow. (a) If the company accepts all positive net present value Investments, which of these projects will it accept? (b) If the company can choose only one project, which will it choose? Potential Projects Net present value Project A $1,400 Project B $(12,100) Project C $15,000 (a) If the company accepts all positive net present value investments, which of these projects will it accept? (b) If the company can choose only one project, which will it choose?arrow_forwardABC Telecom has to choose between two mutually exclusive projects. If it chooses project A, ABC Telecom will have the opportunity to make a similar investment in three years. However, if it chooses project B, it will not have the opportunity to make a second investment. The following table lists the cash flows for these projects. If the firm uses the replacement chain (common life) approach, what will be the difference between the net present value (NPV) of project A and project B, assuming that both projects have a weighted average cost of capital of 11%? Project A Year 0: Year 1: Year 2: Year 3: $9,351 O $15,585 $14,027 $13,247 O $11,689 $21,804 $23,881 Cash Flow O $24,919 O $20,766 O $17,651 -$17,500 10,000 16,000 15,000 ABC Telecom is considering a three-year project that has a weighted average cost of capital of 12% and a NPV of $49,876. ABC Telecom can replicate this project indefinitely. What is the equivalent annual annuity (EAA) for this project? Project B Year 0: Year 1: Year…arrow_forwardYou are the operations manager at a large firm looking to make a capital investment in a futureproject. Your company is considering two project investments. Project A’s payback period is 3years, and Project B’s payback period is 5.5 years.Your company requires a payback period of no more than 5 years on such projects.a. Which project should they further consider? Why?b. Is there an argument that can be made to advance either project or neither project? Why?c. What other factors might be necessary to make that decision?arrow_forward
- You run a construction firm. You have just won a contract to build a government office complex. Building it will require an investment of $10.4 million today and $4.8 million in one year. The government will pay you $21.8 million in one year upon the building's completion. Suppose the interest rate is 10.2% a. What is the NPV of this opportunity? b. How can your firm turn this NPV into cash today? a. What is the NPV of this opportunity? The NPV of the proposal is $ million. (Round to two decimal places.)arrow_forwardYou are considering an investment in a clothes distributer. The company needs $105,000 today and expects to repay you $120,000 in a year from now. What is the IRR of this investment opportunity? Given the riskiness of the investment opportunity, your cost of capital is 17%. What does the IRR rule say about whether you should invest? What is the IRR of this investment oppurtunity? The IRR of this investment opppurtunity is ____%arrow_forwarda. What is the net present value (at the discount rate of 10%) of this project?b. Perot’s engineers have determined that spending $10 million more on development will allow them to add even more advanced features. Having a more advanced chip will allow them to price the chip $50 higher in both years ($870 for year 1 and $700 for year 2). What is the NPV of the project if this option is implemented?c. If sales are only 200,000 the first year and 100,000 the second year, what would the NPV of the project be? Assume the development costs and sales price are as originally estimated. Development cost - $1,250,000Estimated development time - 9 monthsPilot testing - $200,000Ramp-up cost - $400,000Marketing and support cost - $150,000/yrSales & Production volume - $60,000/yrUnit production cost - $100Unit price - $205Interest rate - 8%arrow_forward
- Consider two mutually exclusive alternatives and the do-nothing approach. Project X has an initial investment of $175 and annual positive cash flows of $65 for four years. Project Y has an initial investment of $88 and annual positive cash flows of $25 for four years. Determine the following: at what interest rates Project X would be attractive? at what interest rates would Project Y be attractive? at what interest rates would it be best to do nothing.arrow_forwardYOU ARE A FINANCIAL ANALYST FOR A COMPANY THAT IS CONSIDERING A NEW PROJECT. IF THE PROJECT IS ACCEPTED, IT WILL USE A FRACTION OF A STORAGE FACILITY THAT THE COMPANY ALREADY OWNS BUT CURRENTLY DOES NOT USE. THE PROJECT IS EXPECTED TO LAST 10 YEARS, AND THE ANNUAL DISCOUNT RATE IS 10% (COMPOUNDED ANNUALLY). YOU RESEARCH THE POSSIBILITIES, AND FIND THAT THE ENTIRE STORAGE FACILITY CAN BE SOLD FOR €100,000 AND A SMALLER (BUT BIG ENOUGH) FACILITY CAN BE ACQUIRED FOR €40,000. THE BOOK VALUE OF THE EXISTING FACILITY IS €60,000, AND BOTH THE EXISITING AND THE NEW FACILITIES (IF IT IS ACQUIRED) WOULD BE DEPRECIATED STRAIGHT LINE OVER 10 YEARS (DOWN TO A ZERO BOOK VALUE). THE CORPORATE TAX RATE IS 40%. DISCUSS WHAT IS THE OPPORTUNITY COST OF USING THE EXISTING STORAGE CAPACITY?arrow_forwardSuppose the multinational Milton Asset Extraction (MAX) is considering an overseas project in a country with substantial political risk. MAX predicts that the project will yield USD100 million each year for two years. The initial cost of the project is USD145 million. In any given year there is a 13% chance that the project will be expropriated by the host country’s government. The discount rate for the project is 8%. Calculate the expected net presentarrow_forward
- OpenDoor Cafe is considering opening a new food court in a major US city. The initial investment is expected to be $ 12,550,000. The projected cash flows are $4, 955,000 in years one and two, $2, 185,000 in year three, $2,715,000 in year four, and $3,040,000 on year five. What is this project's internal rate of return? Group of answer choices 6.70% 17.26 % 11.28% 15.02%arrow_forwardYou run a construction firm. You have just won a contract to build a government office building. It will take one year to construct it requiring an investment of $9.32 million today and $5.00million in one year. The government will pay you $20.50 million upon the building's completion. Suppose the cash flows and their times of payment are certain, and the risk-free interest rate is12%. What is the NPV of this opportunity? (Round to two decimalplaces.) How can your firm turn this NPV into cash today? (Round to two decimalplaces.)arrow_forwardWhat is the value of the abandonment option (in millions), in the question below? Round your answer to two decimal places... Sunshine Smoothies Company (SSC) manufactures and distributes smoothies.It is considering the introduction of a "weight loss" smoothie.The project would require a $4 million investment outlay today (t = 0).The after-tax cash flows would depend on whether the weight loss smoothie is well received by consumers.There is a 30% chance that demand will be good, in which case the project will produce after-tax cash flows of $2 million at the end of each of the next 3 years.There is a 70% chance that demand will be poor, in which case the after-tax cash flows will be $1 million for 3 years.The project is riskier than the firm's other projects, so it has a WACC of 12%.The firm will know if the project is successful after receiving first year's cash flows.After receiving the first year's cash flows it will have the option to abandon the project.If the firm decides to…arrow_forward
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author: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 ProfessorPublisher:McGraw-Hill Education