Concept explainers
Growing perpetuities and
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PRIN.OF CORPORATE FINANCE
- 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 3.0 and 3.5 years, respectively. Time: 1. 4 Cash flow: -$239,000 $66,200 $84,400 $141,400 $122,400 $81,600 Use the NPV decisiontule to evaluate this project. (Do not round intermediate calculations and round your final answer to 2 decimal places.) NPV Should it be accepted or rejected? O rejected O accepted MacBook Airarrow_forwardSuppose 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 13 percent, and that the maximum allowable payback and discounted payback statistics for your company are 2.5 and 3.0 years, respectively. Time: 1 2 3 4 5 Cash flow: $64,900 $83,100 $140,100 $121,100 $80,300 $345,000 Print Use the IRR decision rule to evaluate this project. (Do not round intermediate calculations and round your final answer to 2 decimal places.) erences IRR Should it be accepted or rejected? О ассepted O rejectedarrow_forwardYou are a consultant to a firm evaluating an expansion of its current business. The cash-flow forecasts (in millions of dollars) for the project are as follows: Years Cash Flow -10 1-5 +4 On the basis of the behavior of the firm's stock, you believe that the beta of the firm is 1.2. Assume that the project has the same risk as the firm overall. Given that the rate of return available on risk-free investments is 4% and that the expected rate of return on the market portfolio is 15%, would you accept or reject the project? Аcсept Rejectarrow_forward
- 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 2.5 and 3.0 years, respectively. Time: 0 1 2 3 4 5 Cash flow −$231,000 $65,400 $83,600 $140,600 $121,600 $80,800 Use the discounted payback decision rule to evaluate this project. (Do not round intermediate calculations and round your final answer to 2 decimal places.) Discounted payback _____.__ yearsarrow_forwardSuppose 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 13 percent, and that the maximum allowable payback and discounted payback statistics for your company are 2.5 and 3.0 years, respectively. Time: Cash flow: 0 1 2 3 4 5 -$345,000 $64,900 $83,100 $140,100 $121,100 $80,300 Use the IRR decision rule to evaluate this project. (Do not round intermediate calculations and round your final answer to 2 decimal places.) IRR %arrow_forwardSuppose 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 13 percent, and that the maximum allowable payback and discounted payback statistics for your company are 2.5 and 3.0 years, respectively. Time: 0 1 2 3 4 5 Cash flow: −$366,000 $64,900 $83,100 $140,100 $121,100 $80,300 Use the PI decision rule to evaluate this project. (Do not round intermediate calculations and round your final answer to 2 decimal places.) PI: _____.__arrow_forward
- 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 3.0 and 3.5 years, respectively. Time: 0 1 2 3 4 5 Cash flow: −$238,000 $66,100 $84,300 $141,300 $122,300 $81,500 Use the NPV decision rule to evaluate this project.arrow_forward1. A company is considering investing in a project. The future perpetual cash flow is either $750K if the market goes up or $125K if the market goes down next year. The objective probability the market will go up is 20%. The appropriate risk-adjusted rate of return (cost of capital) is 25%. The initial capital investment required at time 0 is $1200K. а. Should the company invest in this project? b. Upon closer inspection the CFO realizes the company actually has some flexibility in managing this project. Specifically, if the market goes down, the company can abandon the project, and liquidate its original capital investment for 75% of its original value. If, however, the market should go up, the company could expand operations, which would result in twice the original PV of the cash flows. To expand the company will have to make an additional capital expenditure of $800K. The CFO wants to know if the company should now proceed with the project with the added flexibilities, and asks…arrow_forwardSuppose 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: 1 2 3 5 Cash flow: -$285,000 $47,800 $66,000 $105,000 $104, 000 $63, 200 Use the MIRR decision rule to evaluate this project. (Do not round intermediate calculations and round your final answer to 2 decimal places.) MIRR % Should it be accepted or rejected?arrow_forward
- 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 12 percent, and that the maximum allowable payback and discounted payback statistics for your company are 3 and 3.5 years, respectively. Time: 0 1 2 3 4 5 Cash flow: −$260,000 $60,800 $79,000 $131,000 $117,000 $76,200 Use the MIRR decision rule to evaluate this project.arrow_forwardSuppose 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 3.0 and 3.5 years, respectively. Time: Cash flow: 0 1 2 -$241,000 $66,400 $84,600 Payback Use the payback decision rule to evaluate this project. Note: Round your answer to 2 decimal places. years 4 3 $141,600 $122,600 Should the project be accepted or rejected? (Click to select) 5 $81,800arrow_forwardConsider an entrepreneur who plans to invest in a project that requires an initial investment of $1,800 this year. The project will generate either $1,600 or $4,200 next year. The cash flows of the project depend on whether the economy is weak or strong. Both scenarios are equally likely. The risk-free rate is 4% and the risk premium of the project is 12%. Assume perfect capital markets. Now assume that the entrepreneur will borrow $400 at 5% interest rate to finance the project. The cost of equity of the project is closest to: 16.60% 17.72% 18.29% 19.43% None of the abovearrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT