Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 2, Problem 2SQ
Summary Introduction
To determine: The value of the building.
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You are considering the investment of $111,000 (today) in a
lemonade stand.
Also, you expect the stand to generate the following future
cash flows:
• At the end of year 1: $0
• At the end of year 2: $0
• At the end of year 3: $0
• At the end of year 4: $178,000
What is the IRR (Internal Rate of Return) of this project?
(Answer to the nearest 0.01%)
You are considering opening a new plant. The plant will cost $100.7 million upfront and will take one year to build.
After that, it is expected to produce profits of $28.6 million at the end of every year of production. The cash flows are
expected to last forever. Calculate the NPV of this investment opportunity if your cost of capital is 6.3%. Should you
make the investment? Calculate the IRR. Does the IRR rule agree with the NPV rule?
Here is the cash flow timeline for this problem:
Years
0
2
+
28.6
3
28.6
4
+
28.6
Cash Flow ($ million) - 100.7
Calculate the NPV of this investment opportunity if your cost of capital is 6.3%.
The NPV of this investment opportunity is $ million. (Round to two decimal places.)
Forever
28.6
You are considering opening a new plant. The plant will
cost $101.4 million upfront and will take one year to
build. After that, it is expected to produce profits of $
29.6 million at the end of every year of production. The
cash flows are expected to last forever. Calculate the
NPV of this investment opportunity if your cost of
capital is 7.2 % . Should you make the investment?
Calculate the IRR. Does the IRR rule agree with the NPV
rule?
Chapter 2 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 2 - (FV) In 1880, five aboriginal trackers were each...Ch. 2 - Prob. 2SQCh. 2 - (PV) Your company can lease a truck for 10,000 a...Ch. 2 - (RATE) Ford Motor stock was one of the victims of...Ch. 2 - Prob. 5SQCh. 2 - Prob. 6SQCh. 2 - Prob. 8SQCh. 2 - (NOMINAL) What monthly compounded interest rate...Ch. 2 - Future values If you invest 100 at an interest...Ch. 2 - Discount factors If the PV of 139 is 125, what is...
Ch. 2 - Prob. 3PSCh. 2 - Prob. 4PSCh. 2 - Opportunity cost of capital Which of the following...Ch. 2 - Perpetuities An investment costs 1,548 and pays...Ch. 2 - Growing perpetuities A common stock will pay a...Ch. 2 - Prob. 8PSCh. 2 - Present values What is the PV of 100 received in:...Ch. 2 - Continuous compounding The continuously compounded...Ch. 2 - Compounding intervals You are quoted an interest...Ch. 2 - Future values and annuities a. The cost of a new...Ch. 2 - Prob. 13PSCh. 2 - Present values A factory costs 800,000. You reckon...Ch. 2 - Present values A machine costs 380,000 and is...Ch. 2 - Opportunity cost of capital Explain why we refer...Ch. 2 - Present values A factory costs 400,000. It will...Ch. 2 - Present values and opportunity cost of capital...Ch. 2 - Prob. 19PSCh. 2 - Prob. 20PSCh. 2 - Annuities David and Helen Zhang are saving to buy...Ch. 2 - Annuities Kangaroo Autos is offering free credit...Ch. 2 - Present values Recalculate the NPV of the office...Ch. 2 - Prob. 24PSCh. 2 - Prob. 25PSCh. 2 - Continuous compounding How much will you have at...Ch. 2 - Perpetuities You have just read an advertisement...Ch. 2 - Compounding intervals Which would you prefer? a....Ch. 2 - Compounding intervals A leasing contract calls for...Ch. 2 - Annuities Several years ago, The Wall Street...Ch. 2 - Prob. 31PSCh. 2 - Prob. 32PSCh. 2 - Prob. 33PSCh. 2 - Prob. 34PSCh. 2 - Prob. 35PSCh. 2 - Amortizing loans Suppose that you take out a...Ch. 2 - Prob. 37PSCh. 2 - Annuities Use Excel to construct your own set of...Ch. 2 - Declining perpetuities and annuities You own an...
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