PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 19, Problem 13PS
APV* A project costs $1 million and has a base-case
- a. If the firm invests, it has to raise $500,000 by a stock issue. Issue costs are 15% of net proceeds.
- b. If the firm invests, there are no issue costs, but its debt capacity increases by $500,000. The present value of interest tax shields on this debt is $76,000.
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A project costs $1 million and has a base-case NPV of exactly zero (NPV = 0).
Note: A negative answer should be indicated by a minus sign. Enter your answers in dollars, not millions of dollars.
a. If the firm invests, it has to raise $540,000 by a stock issue. Issue costs are 15.85% of net proceeds. What is the
project's APV?
b. If the firm invests, there are no issue costs, but its debt capacity increases by $540,000. The present value of interest
tax shields on this debt is $80,000. What is the project's APV?
a. Adjusted present value
b. Adjusted present value
A firm is considering two investment projects, Y and Z. These projects are NOT mutually
exclusive. Assume the firm is not capital constrained. The initial costs and cashflows for these
projects are:
0
1
2
3
Y
-40,000
17,000
17,000
15,000
Z
-28,000
12,000
12,000
20,000
Using a discount rate of 9% calculate the net present value for each project. What decision
would you make based on your calculations?
How would your decision change if the discount rate used for calculating the net present
value is 15%?
Calculate an approximate IRR for each project. Assume the hurdle rate is 9%. What decision
would you make based on your calculations?
Calculate the payback period for each project. The company looks to select investment projects
paying back in 2 years. What decision would you make based on your calculations?
Critically discuss Net Present Value (NPV), Internal Rate of Return (IRR) and payback
period as criteria for investment appraisal.
A project costs $1 million and has a base-case NPV of exactly zero (NPV = 0). (A negative answer should be indicated by a minus sign. Enter your answers in dollars, not millions of dollars.) a. If the firm invests, it has to raise $670,000 by a stock issue. Issue costs are 19.25% of net proceeds. What is the project’s APV?
b. If the firm invests, there are no issue costs, but its debt capacity increases by $670,000. The present value of interest tax shields on this debt is $93,000. What is the project’s APV?
Chapter 19 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 19.A - The U.S. government has settled a dispute with...Ch. 19.A - You are considering a five-year lease of office...Ch. 19 - WACC True or false? Use of the WACC formula...Ch. 19 - WACC The WACC formula seems to imply that debt is...Ch. 19 - Prob. 3PSCh. 19 - Prob. 4PSCh. 19 - WACC Whispering Pines Inc. is all-equity-financed....Ch. 19 - WACC Table 19.3 shows a book balance sheet for the...Ch. 19 - WACC Table 19.4 shows a simplified balance sheet...Ch. 19 - Prob. 8PS
Ch. 19 - WACC Nevada Hydro is 40% debt-financed and has a...Ch. 19 - Flow-to-equity valuation What is meant by the...Ch. 19 - APV True or false? The APV method a. Starts with a...Ch. 19 - APV A project costs 1 million and has a base-case...Ch. 19 - APV Consider a project lasting one year only. The...Ch. 19 - APV Digital Organics (DO) has the opportunity to...Ch. 19 - Prob. 17PSCh. 19 - Prob. 18PSCh. 19 - Prob. 19PSCh. 19 - Prob. 20PSCh. 19 - Prob. 22PSCh. 19 - Company valuation Chiara Companys management has...Ch. 19 - Prob. 26PSCh. 19 - Prob. 27PS
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- A project costs $1 million and has a base-case NPV of exactly zero (NPV = 0). Note: A negative answer should be indicated by a minus sign. Enter your answers in dollars, not millions of dollars. If the firm invests, it has to raise $680,000 by a stock issue. Issue costs are 19.45% of net proceeds. What is the project’s APV? If the firm invests, there are no issue costs, but its debt capacity increases by $680,000. The present value of interest tax shields on this debt is $94,000. What is the project’s APV?arrow_forwardA company is considering investing in a project whose present value without flexibility is 100 million. The project pays no dividends, and the initial investment required is 102 million. The appropriate cost of capital for the project is 20%. The risk-free rate is 5%. Every period the project cash flows either go up by a factor "u", or reduces by a factor "d". Use u = 2.2255 and d% = %3D 0.4493. a) Calculate the NPV of the project without the flexibility. b) Suppose the total investment of 102 million (present value) may be disaggregated into 3 installments, as follows: 52 million in year 0, 21 million in year 1, and 33.075 million in year 2. In any year management has the option to "default" on its planned investment, at which point the project is terminated. What is the NPV for the project with this default option? c) What is the value of this default option?arrow_forwardA Company is considering two mutually exclusive projects whose expected net cash flows are in the table below. The company's WACC is 15%. What is the NPV for Project Y? What is the NPV for Project Z? What is the IRR for Project Y? What is the IRR for Project Z? Which Project, if any, should you choose? Time Project Y Project Z 0 $(420.00) $(950.00) | $(572.00) $270.00 2 $(189.00) $270.00 3 $(130.00) $270.00 4 $1,300.00 $ 270.00 5 $720.00 $270.00 6 $980.00 $270.00 7 $(225.00) $270.00 Please show in excel I think im getting the wrong valuesarrow_forward
- A Company is considering two mutually exclusive projects whose expected net cash flows are in the table below. The company's WACC is 15%. What is the NPV for Project Y? What is the NPV for Project Z? What is the IRR for Project Y? What is the IRR for Project Z? Which Project, if any, should you choose? Time Project Y Project Z 0 S (420.00) S(950.00) 1 S(572.00) $270.00 2 S(189.00) S270.00 3 S(130.00) $270.00 4 $1,300.00 $270.00 5 $720.00 $270.00 6 $980.00 $270.00 7 $(225.00) $270.00 Pleaseshow in excel I think im getting the wrong valuesarrow_forwardA firm is considering the following projects. Its opportunity cost of capital is 9%. Cash Flows, $ 2 3 +1,050 +3,100 0 0 +1,200 +2,100 +3,100 -5,200 +1,050 +1,050 +3,100 +5,200 Project Time: A a-1. What is the payback period on each project? (Do not round intermediate calculations. Round your answers to the nearest whole number.) Project A Project B Project C 1 -5,200 +1,050 -1,200 Project A Project B Project C Payback Period years years years a-2. What is the discounted payback period on each project? (Do not round intermediate calculations. Round your answers to 2 decimal places. If any of the projects does not pay back on a discounted basis, enter zero ("0").) Discounted Payback Period years years years b. Given that you wish to use the payback rule with a cutoff period of 2 years, which projects would you accept?arrow_forwardDiana, Industries is considering a project which has the following cash flows: Year Cash Flow 0 ? 1 $4,000 2 4,000 3 3,000 4 1,500 The project has a payback period of 2.5 years. The firm’s cost of capital is 12 percent. What is the project’s net present value (NPV)? What does the NPV rule advice regarding this investment opportunity?arrow_forward
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- Better plc is comparing two mutually exclusive projects, whose details are given below.The company’s cost of capital is 12 per cent.Project A Project B£m £mYear 0 (150) (152)Year 1 40 80Year 2 50 80Year 3 60 50Year 4 60 40Year 5 80 30(a). Using the net present value method, which project should be accepted?(b). Using the internal rate of return method, which project should be accepted?(c). If the cost of capital increases to 20 per cent in year 5, would your advice change? Hello.i have the solution you send me but i am trying to understand where did you get the calculations for in the worknotes tabel. I still cant calculate the IRR.i really dont understand how to do it. Can you help me please by using the numbers in the tabel so i can understand what is that you are adding or taking away please? I know how to calculate the NPV but not the IRR. I have went over and over this IRR but i still dont understand how you calculate it using the pv and the npv.i dont wanna use excel.arrow_forwardBetter plc is comparing two mutually exclusive projects, whose details are given below.The company’s cost of capital is 12 per cent.Project A Project B£m £mYear 0 (150) (152)Year 1 40 80Year 2 50 80Year 3 60 50Year 4 60 40Year 5 80 30(a). Using the net present value method, which project should be accepted?(b). Using the internal rate of return method, which project should be accepted?(c). If the cost of capital increases to 20 per cent in year 5, would your advice change? Hello.i have the solution you send me but i am trying to understand where did you get the calculations for in the worknotes tabel. I still cant calculate the IRR.i really dont understand how to do it. Can you help me please by using the numbers in the tabel so i can understand what is that you are adding or taking away please? I know how to calculate the NPV but not the IRRarrow_forwardBetter plc is comparing two mutually exclusive projects, whose details are given below.The company’s cost of capital is 12 per cent.Project A Project B£m £mYear 0 (150) (152)Year 1 40 80Year 2 50 80Year 3 60 50Year 4 60 40Year 5 80 30(a). Using the net present value method, which project should be accepted?(b). Using the internal rate of return method, which project should be accepted?(c). If the cost of capital increases to 20 per cent in year 5, would your advice change?arrow_forward
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