Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Chapter 5, Problem 8CQ
Summary Introduction
To determine: Whether the given statement is true or not and whether NPV of Project B is twice as great as that of project A or not for any discount rate in between 0 to 20%.
Payback Period:
The payback period is the period in which the company earns back their investment. It is used to determine whether to take this project or not.
Net present value refers to the present value of all the future cash flow that is adjusted according to the
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Students have asked these similar questions
2. An investment has an installed cost of $412,670. The cash flows over the four-year life of the investment
are projected to be $212,817, $153,408, $102,389, and $72,308. If the discount rate is zero, what is the
NPV? If the discount rate is infinite, what is the NPV? At what discount rate is the NPV just equal
to zero? Sketch the NPV profile for this investment based on these three points.
An investment has an installed cost of $532,800. The cash flows over the four-year life
of the investment are projected to be $216,850, $233,450, $200,110, and $148,820,
respectively.
a. If the discount rate is zero, what is the NPV? (Do not round intermediate
calculations.)
b. If the discount rate is infinite, what is the NPV? (A negative answer should be
indicated by a minus sign.)
c. At what discount rate is the NPV just equal to zero? (Do not round intermediate
calculations and enter your answer as a percent rounded to 2 decimal places, e.g.,
32.16.)
a. NPV
b. NPV
c. IRR
Q
%
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Net Present Value The investment in project A is $1 million, and the investment in project B is $2 million. Both projects have a unique internal rate of return of 20 percent. Is the following statement true or false? For any discount rate from zero percent to 20 percent, project B has an NPV twice as great as that of project A . Explain your answer
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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- If the cash flows for Project M are C0 = -1,000; C1 = +800; C2 = +700 and C3= -200. Calculate the IRR for the project. For what range of discount rates does the project have a positive NPV?arrow_forwardAn investment has an installed cost of $537,800. The cash flows over the four-year life of the investment are projected to be $212,750, $229,350, $196,010, and $144,720, respectively. a. If the discount rate is zero, what is the NPV? (Do not round intermediate calculations.) b. If the discount rate is infinite, what is the NPV? (A negative answer should be indicated by a minus sign.) c. At what discount rate is the NPV just equal to zero? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. NPV b. NPV c. IRR %arrow_forwardProject Analysis. Assume that you are evaluating the following three mutually exclusive projects: A. Complete the following analyses. (For the last two lines, Terminal Value, please write in the dollar amount of the terminal value.) B. Compare and explain the conflicting rankings of the NPVs and TRRs versus the IRRs. C. Using different discount rates, is it possible to get different rankings within the NPV calculation? Why or why not? D. If 10 percent is the required return, which project is preferred? E. Which is the fairer representation of these two projects, TRR or IRR? Why?arrow_forward
- 3) could you use the Figure below that shows the net present value profile of two projects Y and W to answer the following questions: What is the internal rate of return on project Y? Determine the “approximate” discount rate at which you would be indifferent between the two projects Find the “approximate” net present value of project W when the discount rate is 4%.arrow_forwardProject A has an IRR of 14% and NPV of $8,000 while project B has an IRR of 17% and an NPV of $5,000. Which project should you do if the projects are mutually exclusive, and the discount rate is 9%? a. A O b. B O c. Both A and B d. You should calculate profitability index. O e. Neither A nor B because both decision rules give contradictory recommendations.arrow_forwardWhich of the following projects would you feel safest in accepting? Assume the opportunity cost of capital is 12% for each project. ☐(a) “Project A” that has a small, but negative, NPV. ☐(b) “Project B” that has a positive NPV when discounted at 10%. ☐(c) “Project C” that has a cost of capital that exceeds its internal rate of return. ☐(d) “Project D” that has a zero NPV when discounted at 14%. darrow_forward
- Explain how the internal rate of return and net present value are related. If a project has an NPV of $50,000 using a 10 percent discount factor, what does this imply about that project's IRR?arrow_forwardObserve the graph below and identify the internal rate of return. Assume that the discount rate is 8%. What is the net present value of the project? Briefly explain if the project is viable or not? NPV 50000 40000 30000 20000 10000 4 10 12 14 16 18 20 22 24 • 26 28 -10000 discount rate Edit View Insert Format Tools Tablearrow_forwardUse the NPV method to determine whether Kyler Products should invest in the following projects: • Project A costs $275,000 and offers seven annual net cash inflows of $58,000. Kyler Products requires an annual return of 12% on projects like A. • Project B costs $390,000 and offers ten annual net cash inflows of $70,000. Kyler Products demands an annual return of 14% on investments of this nature. (Click the icon to view the present value annuity table.) (Click the icon to view the present value table.) F (Click the icon to view the future value table.) (Click the icon to view the future value annuity table.) Requirement What is the NPV of each project? What is the maximum acceptable price to pay for each project? C Calculate the NPV of each project. (Round your answers to the nearest whole dollar. Use parentheses or a minus sign for negative net present values.) The NPV of Project A isarrow_forward
- Please answer the following questions using the information below: NPV. Using a 10% required rate of return, calculate the NPV for this project. Should it be accepted or rejected? PI. Calculate the Profitability Index (PI) for this project. Should it be accepted or rejected? Consider the following cash flows: Year 0 1 2 3 4 5 6 Cash Flow -$8,000 $3,000 $3,600 $2,700 $2,500 $2,100 $1,600 Payback. The company requires all projects to payback within 3 years. Calculate the payback period. Should it be accepted or rejected? Discounted Payback. Calculate the discounted payback using a discount rate of 10%. Should it be accepted or rejected? IRR. Calculate the IRR for this project. The company’s required rate of return is 10%. Should it be accepted or rejected? NPV. Using a 10% required rate of return, calculate the NPV for this project. Should it be accepted or rejected? PI. Calculate the Profitability Index (PI) for this project. Should it be accepted or rejected?…arrow_forwardConsider the following project balance profiles for proposed investment projects. Statement 1-For Project A, the cash now at the end of year 2 is $100.Statement 2-For Project C, its net future worth at the end of year 2 is $150.Statement 3-For Project B, the interest rate used is 25%.Statement 4-For Project A, the rate of return should be greater than 15%.Which of the statement(s) above is (are) correct?(a) Just Statements 1 and 2(b) Just Statements 2 and 3(c) Just Statements 1 and 3( d) Just Statements 2, 3, and 4arrow_forwardFind the modified internal rate of return (MIRR) for a proposed project costing $12,513. Assume that the appropriate cost of capital for projects of this risk level, at this company is 10.96%, and the estimated cash flows for the life of the project are found in the table below. (If you calculate an MIRR of 20.22% , please enter 20.22- do not include the % symbol, and use at least two decimal places). Year 1 $7,261 Year 2 $4,832 Year 3 $9,441.2 Year 4 $13,000 Year 5 $12,638arrow_forward
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