PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Textbook Question
Chapter 5, Problem 9PS
The opportunity cost of capital is 8%. Suppose you can undertake Alpha or Beta, but not both. Use the IRR rule to make the choice. (Hint: What’s the incremental investment in Alpha?)
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The blue curve (labeled "L") depicts the NPV for a project with larger cash flows later of -$1,000, $100, $300, $400, and $675. The red curve (labeled "S") depicts the NPV for a project with larger cash flows sooner of -$1,000, $500, $400, $300, and $100. Drag on the graph either left or right to
change the cost of capital interest rate at which the NPV is evaluated for the two projects.
NPV ($)
500-
400
300
200-
100.40100-
78.82
0
-100-
Project S: NPV = CF₁+N CF₁
-=1 (1+r)
N CF₂
Project L: NPV = CF₁ + Σ = 1 (1+r) ²
+ ΣΜ = = -S1, 000 +
²
L
¡=-$1,000+
S
15
$500
$400
$300
$100
(1+0.1000)¹ (1+0.1000)² (1+0.1000)³ (1+0.1000)*
20
+
Cost of Capital (%)
$100
$300
$400
$675
(1+0.1000)¹ (1+0.1000) (1+0.1000)³ (1+0.1000)*
+
+
+
+
+
= $78.82
= $100.40
Compute the Profitability Index (PI) for each project?
Project A
Project B
Profitability Index (PI)
5- In light of your answers above, suppose that these two projects might be mutually exclusive or independent. According to these two assumptions, fill in the blanks in the table below with the suitable answer:
Points
Investment Criteria
If A and B are mutually exclusive, then I would select
If A and B are independent, then I would select
PBP
NPV
IRR
PI
Finance Question
Chapter 5 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 5 - (IRR) Check the IRRs for project F in Section 5-3.Ch. 5 - (IRR) What is the IRR of a project with the...Ch. 5 - (XIRR) What is the IRR of a project with the...Ch. 5 - Payback a. What is the payback period on each of...Ch. 5 - Payback Consider the following projects: a. If the...Ch. 5 - Prob. 3PSCh. 5 - IRR Write down the equation defining a projects...Ch. 5 - Prob. 5PSCh. 5 - IRR Calculate the IRR (or IRRs) for the following...Ch. 5 - IRR rule You have the chance to participate in a...
Ch. 5 - IRR rule Consider a project with the following...Ch. 5 - IRR rule Consider projects Alpha and Beta: The...Ch. 5 - IRR rule Consider the following two mutually...Ch. 5 - IRR rule Mr. Cyrus Clops, the president of Giant...Ch. 5 - Prob. 12PSCh. 5 - Investment criteria Consider the following two...Ch. 5 - Profitability index Look again at projects D and E...Ch. 5 - Capital rationing Suppose you have the following...Ch. 5 - Prob. 17PSCh. 5 - Prob. 18PS
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