EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Question
Chapter 11, Problem 11P
a)
Summary Introduction
To determine:
b)
Summary Introduction
To determine: Project’s certainty equivalent net present value.
c)
Summary Introduction
To determine: Whether the project should be accepted or not.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Consider the case of another company. Kim Printing is evaluating two mutually exclusive projects. They both require a $1 million investment today and
have expected NPVS of $200,000. Management conducted a full risk analysis of these two projects, and the results are shown below.
Risk Measure
Standard deviation of project's expected NPVS
Project beta
Correlation coefficient of project cash flows (relative to the firm's existing projects)
Which of the following statements about these projects' risk is correct? Check all that apply.
Project B has more stand-alone risk than Project A.
Project A has more corporate risk than Project B.
Project A
$80,000
1.2
0.7
Project B has more corporate risk than Project A.
Project A has more market risk than Project B.
Project B
$40,000
1.0
0.9
OmegaTech is considering project A. The project would require an initial investment of $58,500.00, and then have an expected cash flow of $72,800.00 in 4
years. Project A has an internal rate of return of 9.57 percent. The weighted-average cost of capital for OmegaTech is 6.69 percent. The risk of the project is
similar to the average risk of the company. Which one of the following assertions is true?
The NPV that Omega Tech would compute for project A is less than or equal to -$11.24.
The NPV that Omega Tech would compute for project A is greater than -$11.24 but less than $0.00.
The NPV that Omega Tech would compute for project A can not be computed from the information provided
The NPV that Omega Tech would compute for project A is equal to greater than $0.00.
OmegaTech is considering project A. The project would require an initial investment of $52,100.00, and then have an expected cash flow of $77,900.00 in 4
years. Project A has an internal rate of return of 9.31 percent. The weighted-average cost of capital for OmegaTech is 6.99 percent. The risk of the project is
similar to the average risk of the company. Which one of the following assertions is true?
The NPV that Omega Tech would compute for project A is less than or equal to -$11.16.
The NPV that Omega Tech would compute for project A can not be computed from the information provided
The NPV that Omega Tech would compute for project A is equal to greater than $0.00.
The NPV that OmegaTech would compute for project A is greater than -$11.16 but less than $0.00.
Chapter 11 Solutions
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Ch. 11 - Prob. 1QTDCh. 11 - Prob. 2QTDCh. 11 - Prob. 3QTDCh. 11 - Prob. 4QTDCh. 11 - Prob. 5QTDCh. 11 - Prob. 6QTDCh. 11 - Prob. 7QTDCh. 11 - Prob. 8QTDCh. 11 - Prob. 9QTDCh. 11 - Prob. 10QTD
Ch. 11 - Prob. 1PCh. 11 - Prob. 2PCh. 11 - Prob. 3PCh. 11 - Prob. 4PCh. 11 - Prob. 5PCh. 11 - Prob. 6PCh. 11 - Prob. 7PCh. 11 - Prob. 8PCh. 11 - Prob. 9PCh. 11 - Prob. 10PCh. 11 - Prob. 11PCh. 11 - Prob. 12PCh. 11 - Prob. 13PCh. 11 - Prob. 14PCh. 11 - Prob. 15PCh. 11 - Prob. 16PCh. 11 - Prob. 17PCh. 11 - Prob. 18PCh. 11 - Prob. 19PCh. 11 - Prob. 20PCh. 11 - Prob. 21PCh. 11 - Prob. 22PCh. 11 - Prob. 23PCh. 11 - Prob. 24PCh. 11 - Prob. 25PCh. 11 - Prob. 26PCh. 11 - Prob. 28PCh. 11 - Prob. 29P
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
- Celestial Crane Cosmetics is analyzing a project that requires an initial investment of $3,225,000. The project's expected cash flows are: Year Cash Flow Year 1 $375,000 Year 2 -125,000 Year 3 500,000 Year 4 400,000 If the company's WACC is 8% and the project has the same risk as the firm's average project, what is the project's modified internal rate of return (MIRR)? Should you accept or reject this project?arrow_forwardFB Company is considering investing in two construction projects, and he developed the following estimates of the cash flows. His required return is 10% and views these projects as equally risky. Required: a) Calculate the net present value (NPV) of each project, assess its acceptability, and indicate which project is best using NPV. b) Calculate the profitability index (PI) of each project, assess its acceptability, and indicate which project is best using PI. c) If both the projects have recorded a positive NPV value and the projects are mutually exclusive, which projects would you recommend for FB Company to undertake? Why?arrow_forwardIf the company uses a project cost of capital of 13%, what will be the expected net present value (NPV) of this project? (Mote: Do not round Intermediate calculations and round your answer to the nearest whole dollar.) -$7,874 Ⓒ-$6,630 -$8,288 O-$9,531 St. Margaret Beer Co. has the option to delay starting this project for one year so that analysts can gather more information about whether demand will be strong or weak. If the company chooses to delay the project, it will have to give up a year of cash flows, because the project will then be only a two-year project. However, the company will know for certain if the market demand will be strong or weak before deciding to invest in it. What will be the expected NPV If St. Margaret Beer Co. delays starting the project? (Note: Do not round Intermediate calculations and round your answer to the nearest whole dollar.) $1,880 Ⓒ$1,410 What is the value of St. Margaret Beer Co's option to delay the start of the project? (Note: Do not round…arrow_forward
- ZLIK Inc is considering methods by which to evaluate a multi-year project that requires a large $55 million investment. Assuming the project has conventional cash flows, under which conditions would the project be an acceptable investment for ZLIK? Select all that apply. A) NPV < 0 B) NPV > 0 C) IRR > firm's required return D) IRR < firm's required return E) Profitability Index > 1.0 F) Profitability Index < 1.0arrow_forwardThe management of Digital Waves, Inc. is considering a project with a net initial cost of$115,000 and an annual net cash inflow estimated at $30,000 over the project's life of 5years. The company has a cost of capital of 6 percent. The project under considerationhas risk that is typical for the company.What is the project's IRR? Show enough trials to indicate that you understand the process. Show that your answer equates the cost of the project to the present value of future cash flows.arrow_forwardYokam Company is considering two alternative projects. Project 1 requires an initial investment of $400,000 and has a present value of cash flows of $1,100,000. Project 2 requires an initial investment of $4,000,000 and has a present value of cash flows of $6,000,000. 1. Compute the profitability index for each project. 2. Based on the profitability index, which project should the company prefer? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Compute the profitability index for each project. Project 1 Project 2 Choose Numerator: Profitability Index T 7 Choose Denominator: 4 of 5 180 # Next > G Oarrow_forward
- The management of Digital Waves, Inc. is considering a project with a net initial cost of $115,000 and an annual net cash inflow estimated at $30,000 over the project's life of 5 years. The company has a cost of capital of 6 percent. The project under consideration has risk that is typical for the company. a. What is the project's payback period? b. What is the project's NPV? c. What is the project's IRR? d. What is the project’s PI?arrow_forwardSeveral companies, including Barnyard and Energy Solutions Corporation, are considering project A, which is believed by all to have a level of risk that is equal to that of the average-risk project at Barnyard. Project A is a project that would require an initial investment of $78,000 and then produce an expected cash flow of $101,300 in 4 years. Project A has an internal rate of return of 7.65 percent. The weighted-average cost of capital for Barnyard is 10.92 percent and the weighted-average cost of capital for Energy Solutions Corporation is 5.21 percent. What is the NPV that Energy Solutions Corporation would compute for project A? $-2568.40 (plus or minus $10) $144922.17 (plus or minus $10) $-11077.83 (plus or minus $10) $4676.36 (plus or minus $10) None of the above is within $10 of the correct answerarrow_forwardYokam Company is considering two alternative projects. Project 1 requires an initial investment of $420,000 and has a present value of all its cash flows of $1,350,000. Project 2 requires an initial investment of $5 million and has a present value of all its cash flows of $6 million. (a) Compute the profitability index for each project.(b) Based on the profitability index, which project should the company select?arrow_forward
- Cold Goose Metal Works Inc. is a small firm, and several of its managers are worried about how soon the firm will be able to recover its initial investment from Project Delta's expected future cash flows. To answer this question, Cold Goose's CFO has asked that you compute the project's payback period using the following expected net cash flows and assuming that the cash flows are received evenly throughout each year. Complete the following table and compute the project's conventional payback period. For full credit, complete the entire table. (Note: Round the conventional payback period to two decimal places. If your answer is negative, be sure to use a minus sign in your answer.) Expected cash flow Cumulative cash flow Conventional payback period: Cash flow $ Discounted cash flow $ Cumulative discounted cash flow $ Discounted payback period: Year 0 -$6,000,000 O The discounted payback period O The regular payback period O $1,714,226 $3,957,217 years The conventional payback period…arrow_forwardCold Goose Metal Works Inc. is a small firm, and several of its managers are worried about how soon the firm will be able to recover its initial investment from Project Omega's expected future cash flows. To answer this question, Cold Goose's CFO has asked that you compute the project's payback period using the following expected net cash flows and assuming that the cash flows are received evenly throughout each year. Complete the following table and compute the project's conventional payback period. For full credit, complete the entire table. Note: Round the conventional payback period to two decimal places. Year 0 Year 1 Year 2 Year 3 4,000,000 $1,600,000 $3,400,000 Expected cash flow $1,400,000 Cumulative cash flow Conventional payback period: The conventional payback period ignores the time value of money, and this concerns Cold Goose's CFO. He has now asked you to compute Omega's discounted payback period, assuming the company has a 10% cost of capital. Complete the following…arrow_forwardYokam Company is considering two alternative projects. Project 1 requires an initial investment of $470,000 and has a present value of all its cash flows of $2,350,000. Project 2 requires an initial investment of $5,000,000 and has a present value of all its cash flows of $6,000,000. (a) Compute the profitability index for each project. (b) Based on the profitability index, which project should the company select? Complete this question by entering your answers in the tabs below. Required A Required B Compute the profitability index for each project. Profitability Index Numerator: Denominator: Profitability Index = Profitability index Project 1 Project 2arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Financial Risks - Part 1; Author: KnowledgEquity - Support for CPA;https://www.youtube.com/watch?v=mFjSYlBS-VE;License: Standard youtube license