PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 2, Problem 37PS
Growing perpetuities and
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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 Air
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.…
Chapter 2 Solutions
PRIN.OF CORPORATE FINANCE
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. 7SQCh. 2 - (NOMINAL) What monthly compounded interest rate...Ch. 2 - Opportunity cost of capital Which of the following...Ch. 2 - Opportunity cost of capital Explain why we refer...
Ch. 2 - Prob. 3PSCh. 2 - Compound interest New Savings Bank pays 4%...Ch. 2 - Compound interest In 2017, Leonardo da Vincis...Ch. 2 - Future values If you invest 100 at an interest...Ch. 2 - Prob. 7PSCh. 2 - Future values In the five years preceding the end...Ch. 2 - Discount factors a. If the present value of 139 is...Ch. 2 - Prob. 10PSCh. 2 - Prob. 11PSCh. 2 - Present values What is the PV of 100 received in:...Ch. 2 - Prob. 13PSCh. 2 - Present values A factory costs 800,000. You reckon...Ch. 2 - Present values Recalculate the NPV of the office...Ch. 2 - Present values and opportunity cost of capital...Ch. 2 - Perpetuities An investment costs 1,548 and pays...Ch. 2 - Perpetuities You have just read an advertisement...Ch. 2 - Growing perpetuities A common stock will pay a...Ch. 2 - Prob. 20PSCh. 2 - Prob. 21PSCh. 2 - Annuities Kangaroo Autos is offering free credit...Ch. 2 - Annuities David and Helen Zhang are saving to buy...Ch. 2 - Prob. 24PSCh. 2 - Annuities Several years ago, The Wall Street...Ch. 2 - Prob. 26PSCh. 2 - Prob. 27PSCh. 2 - Prob. 28PSCh. 2 - Prob. 29PSCh. 2 - Annuities due A store offers two payment plans....Ch. 2 - Amortizing loans A bank loan requires you to pay...Ch. 2 - Amortizing loans Suppose that you take out a...Ch. 2 - Future values and annuities a. The cost of a new...Ch. 2 - Prob. 34PSCh. 2 - Growing annuities You are contemplating membership...Ch. 2 - Prob. 36PSCh. 2 - Growing perpetuities and annuities Your firms...Ch. 2 - Compounding intervals A leasing contract calls for...Ch. 2 - Compounding intervals Which would you prefer? a....Ch. 2 - Compounding intervals You are quoted an interest...Ch. 2 - Prob. 41PSCh. 2 - Continuous compounding How much will you have at...Ch. 2 - Continuous compounding The continuously compounded...Ch. 2 - Prob. 44PSCh. 2 - Annuities Use Excel to construct your own set of...Ch. 2 - Declining perpetuities and annuities You own an...
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- 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 %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: 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_forwardK You have been offered a unique investment opportunity. If you invest $11,300 today, you will receive $565 one year from now, $1,695 two years from now, and $11,300 ten years from now. a. What is the NPV of the opportunity if the cost of capital is 5.7% per year? Should you take the opportunity? b. What is the NPV of the opportunity if the cost of capital is 1.7% per year? Should you take it now? a. What is the NPV of the opportunity if the cost of capital is 5,7% per year? If the cost of capital is 5.7% per year, the NPV is $. (Round to the nearest cent.)arrow_forward
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