Financial Management: Theory & Practice
16th Edition
ISBN: 9781337909730
Author: Brigham
Publisher: Cengage
expand_more
expand_more
format_list_bulleted
Question
Chapter 10, Problem 4MC
a)
Summary Introduction
Case summary:
The cash flows of Franchise L's would start off slowly however will rise rather quickly as people become much health-conscious, while the cash flows of Franchise S would start off high however will trail off as other chicken competitors comes inside the marketplace and as people become more health-conscious and avoid fried foods. Franchise L serves breakfast and lunch, whereas Franchise S serves only dinner, so it is possible for person X to invest in both franchises.
Here are the net cash flows (in thousand $)
To determine: The definition of
b)
Summary Introduction
To determine: The relationship between IRR and YTM and IRR if equal
c)
Summary Introduction
To determine: The logic behind the IRR method and the franchises should be accepted if they are independent and mutually exclusive.
d)
Summary Introduction
To determine: Whether IRR changes with respect to change in cost of capital.
Expert Solution & Answer
Trending nowThis is a popular solution!
Students have asked these similar questions
Profitability index. Given the discount rate and the future cash flow of each project listed in the following table,
, use the PI to determine which projects the company should accept.
.....
What is the Pl of project A?
(Round to two decimal places.)
Assume you have the following asset and liability in your Balance Sheet: Asset - Bond A Modified Duration = 2.6 years Value = RM1.5 million Liability - Bond B Modified Duration = 3.1 years Value = RM1.0 million
a. Calculate the duration gap.
b. What is the expected change in Net Worth if interest increases by 1%?
c. What should or could you to achieve immunised balance sheet?
Note: Please show all workings.
A project should be accepted if its internal rate of return exceeds:
O the rate of return on a government bond.
the rate the company pays on borrowed funds.
O zero.
O the company's required rate of return.
Chapter 10 Solutions
Financial Management: Theory & Practice
Ch. 10 - Define each of the following terms:
Capital...Ch. 10 - What types of projects require the least detailed...Ch. 10 - Explain why the NPV of a relatively long-term...Ch. 10 - When two mutually exclusive projects are being...Ch. 10 - Suppose a firm is considering two mutually...Ch. 10 - A project has an initial cost of 40,000, expected...Ch. 10 - Refer to Problem 10-1. What is the project’s IRR?
Ch. 10 - Refer to Problem 10-1. What is the projects MIRR?Ch. 10 - Prob. 4PCh. 10 - Prob. 5P
Ch. 10 - Prob. 6PCh. 10 - Your division is considering two investment...Ch. 10 - Edelman Engineering is considering including two...Ch. 10 - Davis Industries must choose between a gas-powered...Ch. 10 - Project S has a cost of 10,000 and is expected to...Ch. 10 - Your company is considering two mutually exclusive...Ch. 10 - Prob. 12PCh. 10 - Cummings Products is considering two mutually...Ch. 10 - Prob. 14PCh. 10 - Prob. 15PCh. 10 - Shao Airlines is considering the purchase of two...Ch. 10 - The Perez Company has the opportunity to invest in...Ch. 10 - Filkins Fabric Company is considering the...Ch. 10 - Prob. 19PCh. 10 - The Aubey Coffee Company is evaluating the...Ch. 10 - Your division is considering two investment...Ch. 10 - Prob. 22PCh. 10 - Start with the partial model in the file Ch10 P23...Ch. 10 - What is capital budgeting?Ch. 10 - Prob. 2MCCh. 10 - c. (1) Define the term net present value (NPV)....Ch. 10 - Prob. 4MCCh. 10 - Draw NPV profiles for Franchises L and S. At what...Ch. 10 - What is the underlying cause of ranking conflicts...Ch. 10 - Define the term modified IRR (MIRR). Find the...Ch. 10 - What does the profitability index (PI) measure?...Ch. 10 - (1) What is the payback period? Find the paybacks...Ch. 10 - Prob. 10MCCh. 10 - In an unrelated analysis, you have the opportunity...Ch. 10 - You are also considering another project that has...
Knowledge Booster
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_forwardConsider two investments with the following sequences of cash flows: (a) Compute the i* for each investment.(b) Plot the present-worth curve for each project on the same chart and find the interest rate that makes the two projects equivalent.(c) If A and B are mutually exclusive investment projects, which project is more economically desirable at MARR of 15%?arrow_forwardThe net present value (NPV) of a project is positive when the discount rate used is: Group of answer choices equal to the project's internal rate of return (IRR). greater than the project's internal rate of return (IRR). equal to the yield to maturity of the bonds issued to finance the project. Less than the project's internal rate of return (IRR).arrow_forward
- Assume you have the following asset and liability in your balance sheet Asset - Bond AModified Duration = 1.5 yearsValue = RM1 million Liability - Bond BModified Duration 2.6 yearsValue = RM2 million a. Calculate the duration gaps?b. What is the expected change in Net worth if interest increases by 1%?c. What should or could you to achieve immunised balance sheet?arrow_forwardThe amount of money originally put into an investment is known as the present value P of the investment. For example, if you buy a $50 U.S. Savings Bond that matures in 10 years, the present value of the investment is the amount of money you have to pay for the bond today. The value of the investment at some future time is known as the future value F. Thus, if you buy the savings bond mentioned above, its future value is $50. If the investment pays an interest rate of r (as a decimal) compounded yearly, and if we know the future value F for t years in the future, then the present value P = P(F, r, t), the amount we have to pay today, can be calculated using the formula below. P = F × 1 (1 + r)t We measure F and P in dollars. The term 1/(1 + r)t is known as the present value factor, or the discount rate, so the formula above can also be written as the following. P = F × discount rate (a) Explain what information the function P(F, r, t) gives you. The function…arrow_forwardCan you answer these in Excel (and show any calculation formulas). See the attached image for the information. 1. What is the payack period, NPV, IRR? 2. What happens to the NPV and IRR if initial capital goes up 30%? 3. How much would the selling price have to increase to compensate for 30% in capital costs to the original level in 1.? 4. What is your recomendation?arrow_forward
- The cash flows associated with an investment project are as follows: Project Y (200 000) Year 1 100 000 2 100 000 3 120 000 4 110 000 The discount rate is 8 percent. What's the discount payback period of the projects? (compile a spreadsheet) Calculate NPV, PI of a projects Calculate IRR of a projects Should the firm accept the project? a) b) c) d)arrow_forwardpls refer to the image attached, 1. suppose that you have the capacity to pay, would you rather borrow a loan that is amortized monthly, or one that is amortized quarterly? 2. what is your considerations when availing a loan? (quantitative or qualitative considerations) Discuss.arrow_forwardPercentages need to be entered in decimal format, for instance 3% would be entered as .03. West Coast Chemical Company (WCCC) is considering two mutually exclusive investments - Project A and Project B. The projects' expected net cash flows for Years 0-5 are shown in the spreadsheet provided. Based on the information in the spreadsheet, what is the NPV for Project A and Project B based on the required return of 10%? What is each project's IRR? If the required rate of return for each project is 13%, which project should West Coast select? If the required rate of return is 9%, what would be the proper choice? If the required rate of return is 15%, what would be the proper choice? For each scenario, explain why you chose the particular project. Refer to the Model-Generated Data portion of the spreadsheet and identify at what rate the NPV profiles for the two projects cross. The spreadsheet shows that Project A has a large cash flow in Year 5 associated with ending the project.…arrow_forward
- Consider the following sets of investment projects: (a) Classify each project as either simple or nonsimple.(b) Compute the i* for Project A, using the quadratic equation.(c) Obtain the rate(s) of return for each project by plotting the PW as a function of interest rate.arrow_forwardConsider an investment project, which behaves according to the cash flow (in local currency) below, as well as the respective inflations for the period. In view of the above and knowing that the capital cost of the project is 15% per year, it is requested: a) The values of NPV and IRR b) A graphical sketch of NPVs versus interest rates c) Decision on the feasibility of the project regarding the IRR and NPV indicators Anos = years Fluxo de caixa = cash flow Taxa de inflação do período = period inflation ratearrow_forwardFind the PV and FV of an investment that makes the following end-of-year payments. The interest rate is 8%. Year Payment 1 100 2 200 3 400 Rate = 8% To find the PV, use the NPV function: PV = Year Payment x (1 + I )^(N-t) = FV1 100 1.17 116.64 2 200 1.08 216.00 3 400 1.00 400.00 Sum = ?PV = ?FV of PV = ?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
