Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
expand_more
expand_more
format_list_bulleted
Related questions
Concept explainers
Question
Transcribed Image Text:Ch 11: Exploring Finance Visualizatians The Cost of Capital with Increasing Cash Flow
1. What is the approximate IRR for the cash flow curve depicted?
a. 10%
b. 13.5%
с. 15%
d. 17.5%
-Select- v
2. When the cost of capital is greater than a project's IRR, the NPV for the project is
a. negative
b. equals the project's IRR
C. positive
d. cannot be determined
-Select- v
3. If the cost of capital decreases, the NPV for the project
a. increases
b. stays the same
c. decreases
d. cannot be determined
-Select- V
4. In the unrealistic situion in which the cost of capital were zero, the NPV of the project
a. is the sum of the cash flows
b. is the upper limit for the NPV of the project
c. both of the above statements are correct
d. neither of the first two statements is correct
-Select- v
Save & Contir
Continue without sa
search
Transcribed Image Text:Exploring Finance Visualizations - The Cost of Capital with Increasing Cash Flow
Cost of Capital: Increasing Cash Flow
Conceptual Overview: Explore how the cost of capital affects the net present value of an investment project's increasing cash flow.
This graph shows the net present value of an investment with annual cash flows of -$1,000, $100, $300, $400, and $675 as a function of different costs of capital (interest %). Note that this cash flow returns increasing amounts after the
initial investrnent. Drag left or right on the graph to move the cursors to see the net present value (NPV) for different costs of capital. The point where the curve crosses the X-axis determines the internal rate of return (IRR). (Note due to
limited pixel resolution, it is sometimes difficult to get to that precise point.)
$100
(1+0.1000)!
$675
(1+0.1000)4
NPV = CF +N CE = -$1, 000 +
$300
$400
= $100.40
L-1 (1+ry
(1+0. 1000)T (1+0. 1000)3
NPV ($)
500-
400-
300
200
100.40 00
0-
15
20
10
10
-100
Cost of Capital %
Created by Gary H. McClelland, Professor Emeritus Univer sity of Colorado Boulder
Cengage Learning. All Rights Reserved.
9:18 AM
79°F
8/10/202
earch
lyp
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution
Trending nowThis is a popular solution!
Step by stepSolved in 5 steps with 1 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- A project's internal rate of return (IRR) is the discount rate YTM on a bond. The equation for calculating the IRR is: timing Project A Project B 0 1 2 CFt is the expected cash flow in Period t and cash outflows are treated as negative cash flows. There must be a change in cash flow signs to calculate the IRR. The IRR equation is simply the NPV equation solved for the particular discount rate that causes NPV to equal zero 320 255 The IRR calculation assumes that cash flows are reinvested at the IRR If the IRR is greater ✔than the project's risk-adjusted cost of capital, then the project should be accepted; however, if the IRR is less than the project's risk-adjusted cost of capital, then the project should be rejected ✓✓✓. Because of the IRR reinvestment rate assumption, when mutually exclusive projects are evaluated the IRR approach can lead to conflicting results from the NPV method. Two basic conditions can lead to conflicts between NPV and IRR: ✔ differences (earlier cash flows in…arrow_forwardQuestion 6 Which one of the following methods predicts the amount by which the value of a firm will change if a project is accepted? O Payback O Profitability index O Net present value O Internal rate of return O Discounted paybackarrow_forward2) D&D is analyzing a project with the provided cash flow information. Can you calculate the project's internal rate of return (IRR)? Keep in mind that the IRR of a project can be lower than the weighted average cost of capital (WACC) or even negative, in which case the project should be rejected. Year Cash flows 0 -$1,000 1 $425 2 $425 3 $425arrow_forward
- 6 An advantage of the net present value method over the internal rate of return model in discounted cash flow analysis is that the net present value method Group of answer choices Uses discounted cash flows whereas the internal rate of return model does not Computes a desired rate of return for capital projects Can be used when there is no constant rate of return required for each year of the project Uses a discount rate that equates the discounted cash inflows with the outflowsarrow_forwardQUESTION #1: Which of the following is a disadvantage of using the IRR method of capital budgeting over other types: A- IRR does not consider the time and value of money. B- IRR assumes reinvestment of project cash flows at the same rate as the IRR C- IRR ignores the prudent simplicity of paybacks D- None of the above QUESTION #2: The net present value (NPV) of an investment is___________. A- The present value of all benefits (cash inflows) B- The present value of all costs (cash outflows) of the project C- The present value of all benefits (cash inflows) minus the present value of all costs (cash outflows) of the project D- The present value of all benefits (cash outflows) minus the present value of all costs (cash inflows) of the projectarrow_forward18. Which method of capital budgeting is best used for longer term capital investments?⦁ Net Present Value⦁ Internal Rate of Return⦁ None of these methods⦁ Both A & Barrow_forward
- When the underlying riskiness of free cash flows (FCF) decreases, the value of the project O increases stays the same decreasesarrow_forwardbe appropriate? Explain. 8.4 Average Accounting Return Concerning AAR: LO 2 Describe how the average accounting return is usually calculated and describe the information this measure provides about a sequence of cash flows. What is the AAR criterion decision rule? a. b. What are the problems associated with using the AAR as a means of evaluating a project's cash flows? What underlying feature of AAR is most troubling to you from a financial perspective? Does the AAR have any redeeming qualities?arrow_forwardWhich of the following statements are true? I At higher discount rate, a project is more likely to be rejected. II A project is acceptable if the IRR = 8% while the cost of capital = 5%. III IRR does not account for time value of money. Group of answer choices 1. All of the above. 2. I and II 3. I and III 4. II and IIIarrow_forward
- 24 Some investment projects require that a company increase its working capital. Under the net present value method, the investment and eventual recovery of working capital should be treated as: A. an initial cash outflow. B. a future cash inflow. C. both an initial cash outflow and a future cash inflow. D. irrelevant to the net present value analysis.arrow_forward2. Match each of the following terms with the appropriate definition. The time expected to recover the cash initially invested in a project. A minimum acceptable rate of return on a potential investment. 1. Discounting A return on investment which results in a zero net present value. 2. Net Present Value A comparison of the cost of 3. Capital Budgeting an investment to its projected cash flows at a single point in time. 4. Accounting Rate of Return 5. Net Cash Flow A capital budgeting method focused on the rate of return on a project's average investment. 6. Internal Rate of Return 7. Payback Period The process of restating future cash flows in terms 8. Hurdle Rate of present time value. Cash inflows minus cash outflows for the period. A process of analyzing alternative long-term investments. >arrow_forwardWhat is the 'golden rule' for finding the Internal Rate of Return (IRR) of an investment project cash flow? a)Vary the discount rate until the net present value of the cash flow equals zero. b)Vary the discount rate until the net present value of the cash flow is positive c)Vary the discount rate to the point of maximum increase in the net present value d)Vary the discount rate until the net present value of the cash is negativearrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- 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 Learning
Corporate 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
Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:9780134897264
Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...
Finance
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