Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Chapter 5, Problem 10CQ
| Year | Project A | Project B |
| 0 | –$1 .000 | $2.000 |
| 1 | CIA | C IB |
| 2 | C2A | C2B |
| 3 | C3A | C3B |
a. If the cash flows from the projects are identical, which of the two projects would have a. higher IRR? Why?
b. If CIB = 2C1A, C2B = 2C2A, and C3B = 2C3A, then is IRRA = IRRB?
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Consider the following two projects:
Project
Year 0
Year 1
Year 2
Year 3
Year 4
Discount
Cash Flow Cash Flow Cash Flow Cash Flow Cash Flow
Rate
A
- 100
40
50
60
N/A
0.13
B
- 73
30
30
30
30
0.13
The net present value (NPV) of project B is closest to:
O A. 17.9
В. 20.3
C. 40.6
O D. 16.2
O O
Consider the following two projects:
Cash flows
Project A
Project B
C0�0
−$ 240
−$ 240
C1�1
100
123
C2�2
100
123
C3�3
100
123
C4�4
100
a. If the opportunity cost of capital is 8%, which of these two projects would you accept (A, B, or both)?
b. Suppose that you can choose only one of these two projects. Which would you choose? The discount rate is still 8%.
c. Which one would you choose if the cost of capital is 16%?
d. What is the payback period of each project?
e. Is the project with the shortest payback period also the one with the highest NPV?
f. What are the internal rates of return on the two projects?
g. Does the IRR rule in this case give the same answer as NPV?
h. If the opportunity cost of capital is 8%, what is the profitability index for each project?
i. Is the project with the highest profitability index also the one with the highest NPV?
j. Which measure should you use to choose between the projects?
Consider projects A and B with the following cash flows:
C0
C1
C2
C3
A
−
$
27
+
$
16
+
$
16
+
$
16
B
−
52
+
27
+
27
+
27
a-1. What is the NPV of each project if the discount rate is 10%? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
a-2. Which project has the higher NPV?
b-1. What is the profitability index of each project? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
b-2. Which project has the higher profitability index?
c. Which project is most attractive to a firm that can raise an unlimited amount of funds to pay for its investment projects?
d. Which project is most attractive to a firm that is limited in the funds it can raise?
Chapter 5 Solutions
Corporate Finance
Ch. 5 - Payback Period and Net Present Value If a project...Ch. 5 - Net Present Value Suppose a project has...Ch. 5 - Comparing Investment Criteria Define each of the...Ch. 5 - Payback and Internal Rate of Return A project has...Ch. 5 - Prob. 5CQCh. 5 - Capital Budgeting Problems What are some of the...Ch. 5 - Prob. 7CQCh. 5 - Prob. 8CQCh. 5 - Net Present Value versus Profitability Index...Ch. 5 - Internal Rate of Return Projects A and B have the...
Ch. 5 - Net Present Value You are evaluating Project A and...Ch. 5 - Modified Internal Rate of Return One of the less...Ch. 5 - Net Present Value It is sometimes stated that the...Ch. 5 - Prob. 14CQCh. 5 - Prob. 1QAPCh. 5 - Prob. 2QAPCh. 5 - Prob. 3QAPCh. 5 - Prob. 4QAPCh. 5 - Prob. 5QAPCh. 5 - Prob. 6QAPCh. 5 - Prob. 7QAPCh. 5 - Prob. 8QAPCh. 5 - Prob. 9QAPCh. 5 - Prob. 10QAPCh. 5 - NPV versus IRR Consider the following cash flows...Ch. 5 - Prob. 12QAPCh. 5 - Prob. 13QAPCh. 5 - Prob. 14QAPCh. 5 - Prob. 15QAPCh. 5 - Comparing Investment Criteria Consider the...Ch. 5 - Prob. 17QAPCh. 5 - Comparing Investment Criteria Consider the...Ch. 5 - Prob. 19QAPCh. 5 - Prob. 20QAPCh. 5 - MIRR Suppose the company in the previous problem...Ch. 5 - Prob. 22QAPCh. 5 - Prob. 23QAPCh. 5 - Prob. 24QAPCh. 5 - Prob. 25QAPCh. 5 - Prob. 26QAPCh. 5 - Prob. 27QAPCh. 5 - Prob. 28QAPCh. 5 - Prob. 29QAPCh. 5 - Prob. 30QAPCh. 5 - Construct a spreadsheet to calculate the payback...Ch. 5 - Based on your analysis, should the company open...Ch. 5 - Prob. 3MC
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