Your boss the chief financial officer (CFO) asked you to analyse 3 different projects under consideration by the company's board. All projects require an initial investment and then provide a perpetuity of cash flows with zero growth. All are equally risky with the same 10% pa required return. All figures are rounded to 4 decimal places. The projects can all be accepted and funded, they're not mutually exclusive. The projects' initial costs and perpetual annual cash flows were provided by the engineering and marketing departments and are believed to be accurate. You calculated the NPV's and IRR's in bold, and made some conclusions about which projects to accept or reject (stated in answer option d). The CFO thanked you for your swift work, but said there's just one thing wrong with your calculations or conclusions, and asked you to fix it up before the table and conclusions are shown at the board meeting tomorrow. Projects with 10% pa required return Initial cash Perpetual annual NPV IRR flow at t=0 cash flow from t=1 ($m) ($m) ($m) (% pa) Project A -140 15 10 (a) 10.7143 Project B Project C -600 50 (b) -100 8.3333 -2,000 100 (c) -1,000 5 Which one of the following calculations or conclusions is NOT correct? Select one: a. 10.7143% pa is project A's IRR. ○ b. -$100 million is project B's NPV. ○ c. -$1,000 million is project C's NPV. O d. Accept projects A and B but reject project C. Clear my choice
Your boss the chief financial officer (CFO) asked you to analyse 3 different projects under consideration by the company's board. All projects require an initial investment and then provide a perpetuity of cash flows with zero growth. All are equally risky with the same 10% pa required return. All figures are rounded to 4 decimal places. The projects can all be accepted and funded, they're not mutually exclusive. The projects' initial costs and perpetual annual cash flows were provided by the engineering and marketing departments and are believed to be accurate. You calculated the NPV's and IRR's in bold, and made some conclusions about which projects to accept or reject (stated in answer option d). The CFO thanked you for your swift work, but said there's just one thing wrong with your calculations or conclusions, and asked you to fix it up before the table and conclusions are shown at the board meeting tomorrow. Projects with 10% pa required return Initial cash Perpetual annual NPV IRR flow at t=0 cash flow from t=1 ($m) ($m) ($m) (% pa) Project A -140 15 10 (a) 10.7143 Project B Project C -600 50 (b) -100 8.3333 -2,000 100 (c) -1,000 5 Which one of the following calculations or conclusions is NOT correct? Select one: a. 10.7143% pa is project A's IRR. ○ b. -$100 million is project B's NPV. ○ c. -$1,000 million is project C's NPV. O d. Accept projects A and B but reject project C. Clear my choice
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
Transcribed Image Text:Your boss the chief financial officer (CFO) asked you to analyse 3 different projects under consideration by
the company's board. All projects require an initial investment and then provide a perpetuity of cash flows
with zero growth. All are equally risky with the same 10% pa required return. All figures are rounded to 4
decimal places. The projects can all be accepted and funded, they're not mutually exclusive.
The projects' initial costs and perpetual annual cash flows were provided by the engineering and marketing
departments and are believed to be accurate. You calculated the NPV's and IRR's in bold, and made some
conclusions about which projects to accept or reject (stated in answer option d). The CFO thanked you for
your swift work, but said there's just one thing wrong with your calculations or conclusions, and asked you
to fix it up before the table and conclusions are shown at the board meeting tomorrow.
Projects with 10% pa required return
Initial cash
Perpetual annual
NPV
IRR
flow at t=0
cash flow from t=1
($m)
($m)
($m)
(% pa)
Project A
-140
15
10
(a) 10.7143
Project B
Project C
-600
50
(b) -100
8.3333
-2,000
100
(c) -1,000
5
Which one of the following calculations or conclusions is NOT correct?
Select one:
a. 10.7143% pa is project A's IRR.
○ b. -$100 million is project B's NPV.
○ c. -$1,000 million is project C's NPV.
O d. Accept projects A and B but reject project C.
Clear my choice
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps
Recommended textbooks for you
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education