Essentials of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
9th Edition
ISBN: 9781259277214
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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Textbook Question
Chapter 9.3, Problem 9.3BCQ
In the shark attractant project, why did we add back the firm’s net working capital investment in the final year?
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A firm evaluates all of its projects by applying the IRR rule. A project under consideration has the following cash flows: -$25,000 today (t=0); $11,000 after one year (t=1), 17,000 after two years (t=2); and 10,000 after three years (t=3). What is the Internal Rate of Return (“IRR”) for this project?
A. Estimate the free cash flow to the firm for each of the 4 years.
B. Compute the payback (using free cash flows) period for investors in the firm.
C. Compute the net present value and internal rate of return to investors in the firm.Would you accept the project? Why or why not?
D. How will you incorporate this information in your existing analysis? Compute the newFCF side costs and benefits. Calculate the new NPV and IRR. Would you accept the project?
Using A, B C with the first picture.
Treynor Industries is investing in a new project. The minimum rate of return the firm requires on thisproject is referred to as the:Select one:a. Internal rate of return.b. Expected return.c. Market rate of return.d. Cost of capital.e. Average arithmetic return
Chapter 9 Solutions
Essentials of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 9.1 - Prob. 9.1ACQCh. 9.1 - What is the stand-alone principle?Ch. 9.2 - Prob. 9.2ACQCh. 9.2 - Prob. 9.2BCQCh. 9.2 - Explain why interest paid is not a relevant cash...Ch. 9.3 - What is the definition of project operating cash...Ch. 9.3 - In the shark attractant project, why did we add...Ch. 9.3 - Prob. 9.3CCQCh. 9.4 - Prob. 9.4ACQCh. 9.4 - How is depreciation calculated for fixed assets...
Ch. 9.5 - Prob. 9.5ACQCh. 9.5 - What are some potential sources of value in a new...Ch. 9.6 - What are scenario and sensitivity analyses?Ch. 9.6 - Prob. 9.6BCQCh. 9.7 - Why do we say that our standard discounted cash...Ch. 9.7 - What are managerial options in capital budgeting?...Ch. 9.7 - Prob. 9.7CCQCh. 9 - Prob. 9.1CCh. 9 - Section 9.2What are sunk costs?Ch. 9 - Prob. 9.3CCh. 9 - Section 9.4If a firms current assets are 150,000,...Ch. 9 - A project has a positive NPV. What could drive...Ch. 9 - If a firms variable cost per unit estimate used in...Ch. 9 - Section 9.7Capital rationing exists when a company...Ch. 9 - Opportunity Cost. In the context of capital...Ch. 9 - Depreciation. Given the choice, would a firm...Ch. 9 - Prob. 3CTCRCh. 9 - Stand-Alone Principle. Suppose a financial manager...Ch. 9 - Prob. 5CTCRCh. 9 - Capital Budgeting Considerations. A major college...Ch. 9 - Prob. 7CTCRCh. 9 - Prob. 8CTCRCh. 9 - Prob. 9CTCRCh. 9 - Sensitivity Analysis and Scenario Analysis. What...Ch. 9 - LO19.11Marginal Cash Flows. A co-worker claims...Ch. 9 - Prob. 12CTCRCh. 9 - Forecasting Risk. What is forecasting risk? In...Ch. 9 - Options and NPV. What is the option to abandon?...Ch. 9 - Prob. 1QPCh. 9 - Relevant Cash Flows. Winnebagel Corp. currently...Ch. 9 - Prob. 3QPCh. 9 - Calculating OCF. Consider the following income...Ch. 9 - Calculating Depreciation. A piece of newly...Ch. 9 - Prob. 6QPCh. 9 - Prob. 7QPCh. 9 - Calculating Project OCF. Rolston Music Company is...Ch. 9 - Calculating Project OCF. H. Cochran, Inc., is...Ch. 9 - Calculating Project NPV. In the previous problem,...Ch. 9 - Calculating Project Cash Flow from Assets. In the...Ch. 9 - NPV and Modified ACRS. In the previous problem,...Ch. 9 - Project Evaluation. Kolbys Korndogs is looking at...Ch. 9 - Project Evaluation. Your firm is contemplating the...Ch. 9 - Project Evaluation. In the previous problem,...Ch. 9 - Prob. 16QPCh. 9 - Prob. 17QPCh. 9 - Sensitivity Analysis. We are evaluating a project...Ch. 9 - Prob. 19QPCh. 9 - Prob. 20QPCh. 9 - Cost-Cutting Proposals. CSM Machine Shop is...Ch. 9 - Sensitivity Analysis. Consider a three-year...Ch. 9 - Project Analysis. You are considering a new...Ch. 9 - Project Analysis. McGilla Golf has decided to sell...Ch. 9 - Project Evaluation. Aria Acoustics, Inc. (AAI),...Ch. 9 - Prob. 26QPCh. 9 - Conch Republic Electronics Conch Republic...Ch. 9 - Conch Republic Electronics Conch Republic...Ch. 9 - Conch Republic Electronics Conch Republic...Ch. 9 - Conch Republic Electronics Conch Republic...Ch. 9 - Conch Republic Electronics Conch Republic...Ch. 9 - Conch Republic Electronics Conch Republic...Ch. 9 - Conch Republic Electronics Conch Republic...Ch. 9 - Conch Republic Electronics Conch Republic...
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- . The payback period The payback method helps firms establish and identify a maximum acceptable payback period that helps in their capital budgeting decisions. Consider the case of Cold Goose Metal Works Inc.: Cold Goose Metal Works Inc. is a small firm, and several of its managers are worried about how soon the firm will be able to recover its initial investment from Project Delta’s expected future cash flows. To answer this question, Cold Goose’s CFO has asked that you compute the project’s payback period using the following expected net cash flows and assuming that the cash flows are received evenly throughout each year. Complete the following table and compute the project’s conventional payback period. For full credit, complete the entire table. (Note: Round the conventional payback period to two decimal places. If your answer is negative, be sure to use a minus sign in your answer.) Year 0 Year 1 Year 2 Year 3 Expected cash flow -$6,000,000…arrow_forwardIf An investment costs $23,958 and will generate cash flow of $6,000 annually for five years. The firm's cost of capital is 10 percent? a. What is the investment's internal rate return? Based on the net present rate return, should the firm makeinvestment? b.What is the investment's net present value? Based on the net present value, should the firm make the investment?arrow_forwardTreynor Industries is investing in a new project. The minimum rate of return the firm requires on thisproject is referred to as the:arrow_forward
- The IBC Company is considering undertaking an investment that promises the following cash flows: Period 0 is = -$100 Period 1 is =$80 Period 2 is = $80 If the company waits a year, it can make the following investment: Period 1 is = -2 $220 Period = $280 Assume a time value of 0.10. Which investment should the firm undertake? Use both the net present value and IRR approaches. With the IRR method, use incremental cash flows.arrow_forwardSuppose a firm estimates its overall cost of capital for the coming year to be10%. What might be reasonable costs of capital for average-risk, high-risk,and low-risk projects?arrow_forwardThe net present value (NPV) method estimates how much a potential project will contribute to Business ethics/Shareholders Wealth/Employee Benefits, and it is the best selection criterion. The Smaller/Larger the NPV, the more value the project adds; and added value means a Higher/Larger stock price. In equation form, the NPV is defined as: CFt is the expected net cash flow at Time t, r is the project's risk-adjusted cost of capital, N is its life, and cash outflows are treated as negative cash flows. The NPV calculation assumes that cash inflows can be reinvested at the project's risk-adjusted RD/RS/WACC. When the firm is considering independent projects, if the project's NPV exceeds zero the firm should Accept/Reject the project. When the firm is considering mutually exclusive projects, the firm should accept the project with the Lowest Positive/Lowest Negative/Highest Postive/ Highest Negative NPV.Quantitative Problem: Bellinger Industries is considering two projects for inclusion…arrow_forward
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