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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Question
Chapter 2, Problem 35PS
a.
Summary Introduction
To determine: The
b.
Summary Introduction
To determine: The present value if the cash flows are expected for 20 years.
c.
Summary Introduction
To determine: The present value if the cash flows are expected to continue forever with 3% inflation rate.
d.
Summary Introduction
To determine: The present value if the cash flows are expected for 20 years with 3% inflation rate.
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Your firm’s geologists have discovered a small oil field in New York’s Westchester County. The field is forecasted to produce a cash flow of C1 = $2 million in the first year. You estimate that you could earn an expected return of r =12% from investing in stocks with a similar degree of risk to your oil field. Therefore, 12% is the opportunity cost of capital. What is the present value? The answer, of course, depends on what happens to the cash flows after the first year. Calculate present value for the following cases:
The cash flows are forecasted to continue forever, with no expected growth or decline.
The cash flows are forecasted to continue for 20 years only, with no expected growth or decline during that period.
The cash flows are forecasted to continue forever, increasing by 3% per year because of inflation.
The cash flows are forecasted to continue for 20 years only, increasing by 3% per year because of inflation
Your firm's geologists have discovered a small oil field in New York's Westchester County. The field is forecasted to produce a cash
flow of C₁ = $3.5 million in the first year. You estimate that you could earn a return of r= 10.8% from investing in stocks with a similar
degree of risk to your oil field. Therefore, 10.8% is the opportunity cost of capital.
What is the present value? The answer, of course, depends on what happens to the cash flows after the first year. Calculate present
value for the following cases:
a. The cash flows are forecasted to continue forever, with no expected growth or decline.
Note: Enter your answer in dollars, not millions of dollars. Round your answer to the nearest whole dollar amount.
b. The cash flows are forecasted to continue for 20 years only, with no expected growth or decline during that period.
Note: Enter your answer in dollars, not millions of dollars. Do not round intermediate calculations. Round your answer to t
nearest whole dollar amount.…
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of
this risk class is 11 percent, and that the maximum allowable payback and discounted payback statistics for your company are 3 and
3.5 years, respectively.
Time:
Cash flow:
0
1
3
4
-$233,000 $65,600 $83,800 $140, 800 $121,800
MIRR
Use the MIRR decision rule to evaluate this project.
Note: Do not round intermediate calculations and round your final answer to 2 decimal places.
5
$81,000
%
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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