Addison can choose eithera safe or a risky project. For as100 investment, a safe project yields $110 with certainty, while a risky project is equally likely to yield $200 or zero. Addison needs financing for s0 out of 100 dollars. Lenders cannot observe his choice of project. Everyone is risk neutral and the cost of funds is 6% Can Addison finance with debt? OA No, because there's no face value that enables both Addison and the lenders to ean, on average, the cost of funds OB No, because debt holders do not tike risk OC Yes but he will choose the risky project OD. Yes, and the outcome is fully efficient Reset Selection

Addison can choose eithera safe or a risky project. For as100 investment, a safe project yields $110 with certainty, while a risky project is equally likely to yield $200 or zero. Addison needs financing for s0 out of 100 dollars. Lenders cannot observe his choice of project. Everyone is risk neutral and the cost of funds is 6% Can Addison finance with debt? OA No, because there's no face value that enables both Addison and the lenders to ean, on average, the cost of funds OB No, because debt holders do not tike risk OC Yes but he will choose the risky project OD. Yes, and the outcome is fully efficient Reset Selection

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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firm is considering Projects S and L, whose cash flows are shown below. These projects are matually exclusive, equally ricky, and not repeatable. The CEO wants to use the IRR erterion, while the CFO favor the NPV method. You wer ired to advise the firm on the best procedure. If the wrong decision criterion is used, how much potential value would the firm lose? NACC CFS CFL Ⓒ422001 Ob121617 0 1440 O 4318224 O18647 0 $1.025 $2.150 1 5380 $765 $75 2 $380 3 $380 $765 4 1380 5765
A firm must decide between investing in two alternative risky projects, each requiring the same initial investment. Project A has an equal probability of four possible payoffs: $80m, $100m, $120m or $140m. Project B has a 50:50 chance of a payoff of $90m or $126m. Assuming that the firm’s managers are risk averse, which project would they prefer, and why?
A proposed project has a funding requirement of $1M, an NPV of $5M at r = 7% per year, an IRR of 14% per year, and very little risk. Yet it is rejected by the senior management team. What other factor could be wrong with the project proposal? A. Discount Factor too high B. Funding C. Salvage Value D. Time to Payback E. Cumulative Cash Flow not sufficient
Give me correct answer with explanation..j
Jenny Rene, the CFO of Asor Products, Inc., has just completed an evaluation of a proposed capital expenditure for equipment that would expand the firm's manufacturing capacity. Using the traditional NPV methodology, she found the project unacceptable because: NPVtraditional=−$1,887<0 Before recommending rejection of the proposed project, she has decided to assess whether real options might be embedded in the firm's cash flows. Her evaluation uncovered three options and their probability: Option 1: Abandonment—The project could be abandoned at the end of 3 years, resulting in an addition to NPV of $1,040. Option 2: Growth—If the projected outcomes occurred, an opportunity to expand the firm's product offerings further would become available at the end of 4 years. Exercise of this option is estimated to add $2,820 to the project's NPV. Option 3: Timing—Certain phases of the proposed project could be delayed if market and competitive conditions caused the firm's…
Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.
XYZ Corporation evaluates two projects. Projects x and y; the below table shows their cash flows. These projects are mutually exclusive, equally risky and are not repeatable. If the decision is made by choosing the Project with the higher IRR, how much value will be forgone? Wacc %8 0 1 2 3 4 CF(X) ($1,050) $675 $650 CF(Y) ($1,050) $360 $360 $360 $360 a. IRR of Project X: %.......... b. IRR of Project Y: %.......... c. NPV of Project X: $............ d. NPV of Project Y: $............ e. The Value forgone: $..............
Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.
(Capital rationing) The Cowboy Hat Company of Stillwater, Oklahoma, is considering seven capital investment proposals for which the total funds available are limited to a maximum of $11 million. The projects are independent and have the costs and profitability indexes associated with them shown in the popup window: a. Under strict capital rationing, which projects should be selected? b. What problems are there with capital rationing? MCKEN a. Under strict capital rationing, which projects should be selected? (Select the best choice below.) OA. Projects C and F B. Projects D and G OC. Projects C and D OD. Projects D, F and OE. Projects C, D and G Data table (Click on the following icon in order to copy its contents into a spreadsheet.) PROFITABILITY INDEX COST $3,000,000 1.15 2,000,000 1.06 1.34 1.36 6,000,000 5,000,000 3,000,000 6,000,000 1.16 1.25 4,000,000 1.12 PROJECT A ABCDEFG C Bool 1 X Question Viewer
You and another analyst are asked to choose between two projects. Your manager tells you that the opportunity cost of capital is 10%. The other analyst points out that Project B has an IRR of 37.3%, which is much higher than Project A’s IRR of 24.7%, so he thinks Project B is the better project. Do you agree or disagree? Explain your answer. If you disagree with the intern, explain why the other analyst’s logic is incorrect.
A company considering a project with extremely risky cash flows decides to apply a premium to the discount rate used to evaluate the project. The management of the company has set the following limits regarding the use of premia on discount rates: If the CV of the project is less than 1, no premium is added. If the CV of the project is 1 or more, but less than 1.5, the discount rate is multiplied by 1.5 If the CV of the project is 1.5 or more, the discount rate is multiplied by 2. The project under consideration has a CV of 1.5 while the company’s WACC is 10%. What would the discount rate employed to evaluate the project be?
Current Design Co. is considering two mutually exclusive, equally risky, and not repeatable projects, S and L. Their cash flows are shown below. The CEO believes the IRR is the best selection criterion, while the CFO advocates the NPV. If the decision is made by choosing the project with the higher IRR rather than the one with the higher NPV, how much, if any, value will be forgone, i.e., what's the chosen NPV versus the maximum possible NPV? Note that (1) "true value" is measured by NPV, and (2) under some conditions the choice of IRR vs. NPV will have no effect on the value gained or lost. r: 8% Year CFS CFL $149.21 $130.31 $121.42 $101.96 $98.10 0 -$1,200 -$2,800 $700 $600 2 $600 $735 3 $150 $700 4 $110 $1,800

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