Intermediate Financial Management
14th Edition
ISBN: 9780357516782
Author: Brigham, Eugene F., Daves, Phillip R.
Publisher: Cengage Learning
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Chapter 12, Problem 4Q
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To discuss: Whether the changes in the cost of capital brings a change in the
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When two mutually exclusive projects are being compared, explain whythe short-term project might be ranked higher under the NPV criterion ifthe cost of capital is high, whereas the long-term project might be deemedbetter if the cost of capital is low. Would changes in the cost of capital evercause a change in the IRR ranking of two such projects? Why or why not?
When two mutually exclusive projects are being compared, explain why the short-term project might be ranged higher under the NVP criterion if the cost of the capital is high, whereas the long-term project might be deemed better if the cost of capital is low. Would changes in the cost of capital ever cause a change in the IRR ranking of two such projects? Why or why not?
If two mutually exclusive projects were being compared, would a high cost of capital favor the longer-term or the shorter-term project? Why? If the cost of capital declined, would that lead firms to invest more in longer-term projects or shorter-term projects? Would a decline (or an increase) in the WACC cause changes in the IRR ranking of mutually exclusive projects?Note: DONOT GIVE BREIF ANSWER USE SHORT CONCEPTUAL ANSWER
Chapter 12 Solutions
Intermediate Financial Management
Ch. 12 - What types of projects require the least detailed...Ch. 12 - Prob. 3QCh. 12 - Prob. 4QCh. 12 - Prob. 5QCh. 12 - A project has an initial cost of 40,000, expected...Ch. 12 - IRR Refer to Problem 12-1. What is the projects...Ch. 12 - Prob. 3PCh. 12 - Prob. 4PCh. 12 - Prob. 5PCh. 12 - Prob. 6P
Ch. 12 - Your division is considering two investment...Ch. 12 - Edelman Engineering is considering including two...Ch. 12 - Prob. 9PCh. 12 - Project S has a cost of $10,000 and is expected to...Ch. 12 - Prob. 11PCh. 12 - After discovering a new gold vein in the Colorado...Ch. 12 - Prob. 13PCh. 12 - Prob. 14PCh. 12 - The Pinkerton Publishing Company is considering...Ch. 12 - Shao Airlines is considering the purchase of two...Ch. 12 - The Perez Company has the opportunity to invest in...Ch. 12 - Filkins Fabric Company is considering the...Ch. 12 - The Ulmer Uranium Company is deciding whether or...Ch. 12 - The Aubey Coffee Company is evaluating the...Ch. 12 - Your division is considering two investment...Ch. 12 - The Scampini Supplies Company recently purchased a...Ch. 12 - You have just graduated from the MBA program of a...Ch. 12 - Prob. 2MCCh. 12 - Define the term “net present value (NPV).” What is...Ch. 12 - Prob. 5MCCh. 12 - What is the underlying cause of ranking conflicts...Ch. 12 - Prob. 7MCCh. 12 - Prob. 8MCCh. 12 - Prob. 9MCCh. 12 - Prob. 10MCCh. 12 - In an unrelated analysis, you have the opportunity...Ch. 12 - Prob. 12MC
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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
- If two mutually exclusive projects were being compared, would a high cost of capital favorthe longer-term or the shorter-term project? Why? If the cost of capital declined, would thatlead firms to invest more in longer-term projects or shorter-term projects? Would a decline(or an increase) in the WACC cause changes in the IRR ranking of mutually exclusive projects?Explain.arrow_forwardUsing IRR, a project is rejected if the IRR a. is equal to the required rate of return. b. is less than the required rate of return. c. is greater than the cost of capital. d. is greater than the required rate of return. e. produces an NPV equal to zero.arrow_forwardFurther suppose that the same Firm XYZ from Question 1 is considering investments in two projects. Assume that the projects are mutually exclusive. Further assume the following information for the two projects (values are in 1000s): Project A -5,600 1,325 2,148 4,143 Project B -8,400 1,325 2,148 8,055 Year 1 3 Assume that the required return for the two projects is 8%. Show all work for each part of the problem that requires computation. a) What is the NPV for Project A? b) What is the NPV for Project B? c) What is the IRR for Project A? d) What is the IRR for Project B?arrow_forward
- What are the shortcomings of the internal rate of return criterion? How do you make an investment decision based on the IRR? How would the NPV of the same project look?arrow_forwardHow can we use the internal rate of return to evaluate whether we should pursue a specific project? Should we pursue a project when the cost of capital is higher than the internal rate of return?arrow_forwardThe IRR of normal Project X is greater than the IRR of normal Project Y, and both IRRS are greater than zero. Also, the NPV of X is greater than the NPV of Y at the cost of capital. If the two projects are mutually exclusive, Project X should definitely be selected, and the investment made, provided we have confidence in the data. Put another way, it is impossible to draw NPV profiles that would suggest not accepting Project X. Group of answer choices True Falsearrow_forward
- How do you overcome the challenges posed by unequal lives of the projects being comparedand when projects that are being compared have a different levels of capital outlay?arrow_forwardWhy are NPV, BCR, and IRR considered SUPERIOR indicators of Project Feasibility compared to Payback or Recoupment Period and Accounting Rates of Return? Explain briefly.arrow_forwardFinancially, what is the economic worth of outbidding thecompetitors for a project?arrow_forward
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