Fundamentals of Financial Management (MindTap Course List)
15th Edition
ISBN: 9781337395250
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
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Textbook Question
Chapter 11, Problem 10P
CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE PROJECTS A firm with a WACC of 10% is considering the following mutually exclusive projects:
Which project would you recommend? Explain.
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The capital budgeting decision that requires a choice between two decisions is a(n) _______ project.
Independent
Dependent
Mutually exclusive
Inclusive
The actual value that a firm loses when it makes a capital budgeting decision is a(n) ______ cost
Fixed
Opportunity
Sample
Unknown
The number of years required for an investment to return the monies invested is known as a projects
Economic life
Usage rate
Capital decision
Payback period
The future benefits received from investing in a project are the projects
Net cash flows
Net investment
Net cost
Net return
The capital components included in a firms weighted cost of capital are
Common stock
Debt
Retained earnings
All of the above
Weaknesses in using solely the payback method as a measure of a projects risk include
Not accounting for the time value of money
There is no objective criterion for deciding what is an acceptable payback period
Cash flows that occur after the payback period have no impact on the…
Marginal analysis and capital budgeting decisions. A company faces the following schedule of potential
investment projects (all assumed to be equal risk).
Use marginal analysis to decide which projects should NOT be undertaken?
Expected Rate of
Return (%)
Project
alm|0|n|u|u
A
B
с
D
E
F
CH
G
1
Investment
Required ($
million)
25
15
40
35
12
20
18
13
7
OF and G
OH and I
OF, G, H, and I
01
OG, H, I
27
24
21
18
15
14
13
11
8
Cumulative
Investment
The following is the cost of acquiring the funds needed to finance these investment projects.
Cost of Capital (%)
Block of funds ($ million)
First 50
10
Next 25
10.5
11
Next 40
Next 50
12.2
Next 20
14.5
25
40
80
115
127
147
165
178
185
50
75
115
165
185
Cumulative Funds Raised
Q.1. Three mutually exclusive investment alternatives are under consideration. The initial capital outlays and the pattern of the net annual cash benefits (revenues - expenses) for each alternatives are presented in the following table. Based on NPV analysis, if the company’s minimum acceptable rate of return is 10%, which alternative should be the best economic choice? Use appropriate IRR analysis to double-check your selection.
Investment, M$
A
B
C
Initial cost
-$200
-$350
-$500
Net Revenues, year 1 to 3
$80
$105
$85
Net Revenues, year 4
$60
$90
$150
Net Revenues, year 5
$40
$80
$250
Chapter 11 Solutions
Fundamentals of Financial Management (MindTap Course List)
Ch. 11 - How are project classifications used in the...Ch. 11 - Prob. 2QCh. 11 - Why is the NFV of a relatively long-term project...Ch. 11 - Prob. 4QCh. 11 - If two mutually exclusive projects were being...Ch. 11 - Discuss the following statement: If a firm has...Ch. 11 - Why might it be rational for a small firm that...Ch. 11 - Project X is very risky and has an NPV of 3...Ch. 11 - Prob. 9QCh. 11 - A firm has a 100 million capital budget. It is...
Ch. 11 - NPV Project L costs 65,000, its expected cash...Ch. 11 - IRR Refer to problem 11-1. What is the projects...Ch. 11 - MIRR Refer to problem 11-1. What is the projects...Ch. 11 - Prob. 4PCh. 11 - DISCOUNTED PAYBACK Refer to problem 11-1. What is...Ch. 11 - NPV Your division is considering two projects with...Ch. 11 - CAPITAL BUDGETING CRITERIA A firm with a 14% WACC...Ch. 11 - Prob. 8PCh. 11 - CAPITAL BUDGETING CRITERIA: ETHICAL CONSIDERATIONS...Ch. 11 - CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE...Ch. 11 - CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE...Ch. 11 - Prob. 12PCh. 11 - MIRR A firm is considering two mutually exclusive...Ch. 11 - CHOOSING MANDATORY PROJECTS ON THE BASIS OF LEAST...Ch. 11 - NPV PROFILES: TIMING DIFFERENCES An oil-drilling...Ch. 11 - Prob. 16PCh. 11 - CAPITAL BUDGETING CRITERIA A company has an 11%...Ch. 11 - NPV AND IRR A store has 5 years remaining on its...Ch. 11 - Prob. 19PCh. 11 - NPV A project has annual cash flows of 5,000 for...Ch. 11 - Prob. 21PCh. 11 - MIRR A project has the following cash flows: This...Ch. 11 - CAPITAL BUDGETING CRITERIA Your division is...Ch. 11 - BASICS OF CAPITAL BUDGETING You recently went to...
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