CAPITAL BUDGETING CRITERIA A firm with a 14% WACC is evaluating two projects for this year's capital budget. After-tax cash flows are as follows: 1 2 4 Project M Project N - $30,000 %2490,000 $10,000 $28,000 + $10,000 $28,000 + $10,000 $28,000 + $10,000 $28,000 $10,000 $28,000 | - Calculate NPV, IRR, MIRR, payback, and discounted payback for each project. Orcuming the proiects are independent, which one(s) would you recommend? a. 3.

CAPITAL BUDGETING CRITERIA A firm with a 14% WACC is evaluating two projects for this year's capital budget. After-tax cash flows are as follows: 1 2 4 Project M Project N - $30,000 %2490,000 $10,000 $28,000 + $10,000 $28,000 + $10,000 $28,000 + $10,000 $28,000 $10,000 $28,000 | - Calculate NPV, IRR, MIRR, payback, and discounted payback for each project. Orcuming the proiects are independent, which one(s) would you recommend? a. 3.

Fundamentals of Financial Management, Concise Edition (MindTap Course List)

9th Edition

ISBN:9781305635937

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter10: The Cost Of Capital

Section: Chapter Questions

Problem 18P: WACC AND OPTIMAL CAPITAL BUDGET Adamson Corporation is considering four average-risk projects with...

See similar textbooks

Similar questions

WACC AND OPTIMAL CAPITAL BUDGET Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Project Cost Expected Kate of Return 1 2,000 16.00% 2 3,000 15.00 3 5,000 13.75 4 2,000 12.30 The company estimates that it can issue debt at a rate of rd = 10%, and its tax rate is 30%. It can issue preferred stock that pays a constant dividend of 5.00 per year at 50.00 per share. Also, its common stock currently sells for 38.00 per share; the next expected dividend, D1, is 4.25, and the dividend is expected to grow at a constant rate of 5% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock. a. What is the cost of each of the capital components? b. What is Adamson's WACC? c. Only projects with expected returns that exceed WACC will be accepted. Which projects should Adamson accept?
CAPITAL BUDGETING CRITERIA You must analyze two projects, X and Y. Each project costs $10,000, and the firm's WACC is 12%. The expected net cash flows are as follows: 1 2 4 Project X Project Y -$10,000 -$10,000 $6,500 $3,500 $3,000 $3,500 $3,000 $3,500 $1,000 $3,500 Calculate each projecť's NPV, IRR, MIRR, payback, and discounted payback. b. Which project(s) should be accepted if they are independent? c. Which project(s) should be accepted if they are mutually exclusive? a. с. How might a change in the WACC produce a conflict between the NPV and IRR rankings of the two projects? Would there be a conflict if WACC were 5%? (Hint: Plot the NPV profiles. The crossover rate is 6.21875%.) e. Why does the conflict exist?
CAPITAL BUDGETING CRITERIA You must analyze two projects, X and Y. Each project costs $10,000, and the firm's WACC is 12%. The expected net cash flows are as follows: 1 3 4 Project X Project Y -$10,000 -$10,000 $6,500 $3,500 + $3,000 $3,500 $3,000 $3,500 $1,000 $3,500 Calculate each project's NPV, IRR, MIRR, payback, and discounted payback. b. Which project(s) should be accepted if they are independent? Which project(s) should be accepted if they are mutually exclusive? d. How might a change in the WACC produce a conflict between the NPV and IRR rankings of the two projects? Would there be a conflict if WACC were 5%? (Hint: Plot the NPV profiles. The crossover rate is 6.21875%.) e. Why does the conflict exist? a. C.
Modified internal h. Payback period; discounted payback CAPITAL BUDGETING CRITERIA You must analyze two projects, X and Y. Each project costs $10,000, and the firm's WACC is 12%. The expected cash flows are as follows. ST-2 0. 1 2. 4 -$10,000 -$10,000 $3,000 $3,500 $1,000 $3,500 $3,000 Project X Project Y $6,500 $3,500 $3,500 Calculate each project's NPV, IRR, MIRR, payback, and discounted payback. b. Which project(s) should be accepted if they are independent? Which project(s) should be accepted if they are mutually exclusive? d. How might a change in the WACC produce a conflict between the NPV amd IRR rankings of the two projects? Would there be a conflict if WACC were 5%? (Hint: Plot the NPV profiles. The crossover rate is 6.21875%.) a. C. e. Why does the conflict exist?
CAPITAL BUDGETING TECHNIQUES The financial manager of EM Limited is required to analyse two proposed capital investments, namely Projects N and O. Each has a cost of R100 000, and the cost of capital for each project is 12%. Depreciation on each project is estimated at R25 000 per year. The projects expected net profit (loss) are as follows: Year Project N Project O 1 R40 000 R10 000 R5 000 R10 000 R5 000 R10 000 4. (R15 000) R10 000 Questions: (4 1.1 Calculate the payback period for each project. 1.2 Calculate the net present value for each project. 1.3 Determine which project should be chosen based on 1.2 1.4 Calculate the internal rate of return for project N.
Capital Budgeting Techniques Analyze the two independent projects, X and Y. Each project costs $10,000, and the firm’s required rate of return is 12%. The expected net cash flows are as follows: Outflows Inflows Projects Year 1 2 3 4 X -10,000 6,500 3,000 3,000 1,000 Y -10,000 3,500 3,500 3,500 5,500 Required: Calculate for each project: Payback Period IRR NPV PI Give your decision regarding acceptation and rejection of the project. Explain which criteria you based your decision upon and why?
A firm with a 14% WACC is evaluating two projects for this year’s capital budget. After-tax cash flows, including depreciation, are below. Calculate the NPV for each and determine which project the firm should pick. Time Project A Project B 0 -$30,000 -$90,000 1 $10,000 $28,000 2 $10,000 $28,000 3 $10,000 $28,000 4 $10,000 $28,000 5 $10,000 $28,000
Capital Budgeting Assume you are evaluating two mutually exclusive projects, the cash flows of which appear below and that your company uses a cost of capital of 12% to evaluate projects such as these. Time Project A Cash Flows Project B Cash Flows 0 -$300,000 -$405,000 1 -387,000 134,000 2 -193,000 134,000 3 -100,000 134,000 4 600,000 134,000 5 600,000 134,000 6 850,000 134,000 7 -180,000 0 Calculate the payback period and discounted payback period for projects A & B.
Capital Budgeting Assume you are evaluating two mutually exclusive projects, the cash flows of which appear below and that your company uses a cost of capital of 12% to evaluate projects such as these. Time Project A Cash Flows Project B Cash Flows 0 -$300,000 -$405,000 1 -387,000 134,000 2 -193,000 134,000 3 -100,000 134,000 4 600,000 134,000 5 600,000 134,000 6 850,000 134,000 7 -180,000 0 Assuming a cost of capital of 12%, which of these projects should be accepted?
Capital Budgeting Assume you are evaluating two mutually exclusive projects, the cash flows of which appear below and that your company uses a cost of capital of 12% to evaluate projects such as these. Time Project A Cash Flows Project B Cash Flows 0 -$300,000 -$405,000 1 -387,000 134,000 2 -193,000 134,000 3 -100,000 134,000 4 600,000 134,000 5 600,000 134,000 6 850,000 134,000 7 -180,000 0 If Project A and Project B are independent, which project should be undertaken?
Capital Budgeting Assume you are evaluating two mutually exclusive projects, the cash flows of which appear below and that your company uses a cost of capital of 12% to evaluate projects such as these. Time Project A Cash Flows Project B Cash Flows 0 -$300,000 -$405,000 1 -387,000 134,000 2 -193,000 134,000 3 -100,000 134,000 4 600,000 134,000 5 600,000 134,000 6 850,000 134,000 7 -180,000 0 Under what conditions on the cost of capital should project B be preferred to project A?
Capital Budgeting Assume you are evaluating two mutually exclusive projects, the cash flows of which appear below and that your company uses a cost of capital of 12% to evaluate projects such as these. Time Project A Cash Flows Project B Cash Flows 0 -$300,000 -$405,000 1 -387,000 134,000 2 -193,000 134,000 3 -100,000 134,000 4 600,000 134,000 5 600,000 134,000 6 850,000 134,000 7 -180,000 0 Determine the crossover point for these projects’ NPV profiles.