EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 11, Problem 24P
Summary Introduction
To determine: The probability that the given project will have a positive
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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
The net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions.
Consider this case:
Suppose Hungry Whale Electronics is evaluating a proposed capital budgeting project (project Alpha) that will require an initial investment of $500,000. The project is expected to generate the following net cash flows:
Year
Cash Flow
Year 1
$300,000
Year 2
$475,000
Year 3
$500,000
Year 4
$400,000
Hungry Whale Electronics’s weighted average cost of capital is 9%, and project Alpha has the same risk as the firm’s average project. Based on the cash flows, what is project Alpha’s net present value (NPV)?
$344,489
$844,489
$1,319,489
$971,162
Making the accept or reject decision
Hungry Whale Electronics’s decision to accept or reject project Alpha is independent of its decisions on other projects. If the firm follows the NPV method, it should project Alpha.…
The net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions.
Consider this case:
Suppose Happy Dog Soap Company is evaluating a proposed capital budgeting project (project Alpha) that will require an initial investment of $550,000. The project is expected to generate the following net cash flows:
Year
Cash Flow
Year 1
$275,000
Year 2
$450,000
Year 3
$425,000
Year 4
$475,000
Happy Dog Soap Company’s weighted average cost of capital is 8%, and project Alpha has the same risk as the firm’s average project. Based on the cash flows, what is project Alpha’s net present value (NPV)?
$1,226,950
$776,950
$893,492
$1,251,950
Making the accept or reject decision
Happy Dog Soap Company’s decision to accept or reject project Alpha is independent of its decisions on other projects. If the firm follows the NPV method, it should project Alpha.…
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
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- The net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions. Consider this case: Suppose Happy Dog Soap Company is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $3,000,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $300,000 Year 2 $400,000 Year 3 $400,000 Year 4 $500,000 Happy Dog Soap Company’s weighted average cost of capital is 7%, and project Beta has the same risk as the firm’s average project. Based on the cash flows, what is project Beta’s NPV? -$1,662,284 -$1,362,284 -$1,262,284 -$1,994,741 Making the accept or reject decision Happy Dog Soap Company’s decision to accept or reject project Beta is independent of its decisions on other projects. If the firm follows the NPV method, it should project Beta. Suppose your boss…arrow_forwardLehigh Products Company is considering the purchase of nen automated equipment. The project has an expected set present value of $250,000 with a standard deviation of $100,000. Question: 1. What is the probability that the project will have a net present value less than $50,000, assuming that net present value is normally distributed?arrow_forwardNikita Berhad is evaluating a project which expected to earn a series of cash inflows as shown in the table below. The initial investment of this project is RM52,300. If the required rate of return is 12 percent, determine whether this project is profitable or loss by calculating the net present value and profitability index techniques.arrow_forward
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