Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Question
Chapter 6, Problem 19QAP
Summary Introduction
To calculate: NPV to select the better investment opportunity.
Introduction: The term
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Students have asked these similar questions
The net present value of a capital budgeting project is ________.
The difference between the present value of the expected future cash flows and the initial cash outflow
The present value of the expected future cash flows divided by the initial cash outflow
The initial cash outflow divided by the present value of the expected future cash flows
The Basics of Capital Budgeting: Evaluating Cash Flows: IRR
A project's internal rate of return (IRR) is the that forces the PV of the expected future cash flows to equal the initial cash flow. The IRR is an estimate of the project's rate of return, and it is comparable to the on a bond. The equation for calculating the IRR is:
CFt is the expected cash flow in Period t and cash outflows are treated as negative cash flows. There must be a change in cash flow signs to calculate the IRR. The IRR equation is simply the NPV equation solved for the particular discount rate that causes NPV to equal .The IRR calculation assumes that cash flows are reinvested at the . If the IRR is than the project's cost of capital, then the project should be accepted; however, if the IRR is less than the project's cost of capital, then the project should be . Because of the IRR reinvestment rate assumption, when projects are evaluated the IRR approach can lead to conflicting results from the NPV method.…
Consider the following cash flows, for four different projects: (given)
(a) Calculate the conventional payback period for each project.(b) Determine whether it is meaningful to caJculate a payback period for Project D.(c) Assuming i = I 0% calculate the discounted-payback period for each project.
Chapter 6 Solutions
Corporate Finance
Ch. 6 - Opportunity Cost In the context of capital...Ch. 6 - Prob. 2CQCh. 6 - Incremental Cash Flows Your company currently...Ch. 6 - Depreciation Given the choice, would a firm prefer...Ch. 6 - Prob. 5CQCh. 6 - Prob. 6CQCh. 6 - Equivalent Annual Cost When is EAC analysis...Ch. 6 - Prob. 8CQCh. 6 - Capital Budgeting Considerations A major college...Ch. 6 - To answer the next three questions, refer to the...
Ch. 6 - Prob. 11CQCh. 6 - To answer the next three questions, refer to the...Ch. 6 - Prob. 1QAPCh. 6 - Prob. 2QAPCh. 6 - Calculating Project NPV Down Under Boomerang,...Ch. 6 - Calculating Project Cash Flow from Assets In the...Ch. 6 - Prob. 5QAPCh. 6 - NPV and Bonus Depreciation In the previous...Ch. 6 - Prob. 7QAPCh. 6 - Prob. 8QAPCh. 6 - NPV and Bonus Depreciation In the previous...Ch. 6 - Calculating Salvage Value An asset used in a...Ch. 6 - Calculating NPV Thurston Petroleum is considering...Ch. 6 - Prob. 12QAPCh. 6 - Cost-Cutting Proposals Starset Machine Shop is...Ch. 6 - NPV and Bonus Depreciation In the previous...Ch. 6 - Prob. 15QAPCh. 6 - Prob. 16QAPCh. 6 - NPV and Bonus Depreciation Eggz, Inc., is...Ch. 6 - Prob. 18QAPCh. 6 - Prob. 19QAPCh. 6 - Prob. 20QAPCh. 6 - Prob. 21QAPCh. 6 - Prob. 22QAPCh. 6 - Prob. 23QAPCh. 6 - Prob. 24QAPCh. 6 - Prob. 25QAPCh. 6 - Prob. 26QAPCh. 6 - Prob. 27QAPCh. 6 - Prob. 28QAPCh. 6 - Prob. 29QAPCh. 6 - Prob. 30QAPCh. 6 - Prob. 31QAPCh. 6 - Prob. 32QAPCh. 6 - Prob. 33QAPCh. 6 - Prob. 34QAPCh. 6 - Prob. 35QAPCh. 6 - Prob. 36QAPCh. 6 - Prob. 37QAPCh. 6 - Prob. 38QAPCh. 6 - Prob. 39QAPCh. 6 - Prob. 40QAPCh. 6 - Prob. 41QAPCh. 6 - Prob. 42QAPCh. 6 - Prob. 1MCCh. 6 - GOODWEEK TIRES, INC. After extensive research and...
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Similar questions
- A project's internal rate of return (IRR) is the discount rate YTM on a bond. The equation for calculating the IRR is: timing Project A Project B 0 1 2 CFt is the expected cash flow in Period t and cash outflows are treated as negative cash flows. There must be a change in cash flow signs to calculate the IRR. The IRR equation is simply the NPV equation solved for the particular discount rate that causes NPV to equal zero 320 255 The IRR calculation assumes that cash flows are reinvested at the IRR If the IRR is greater ✔than the project's risk-adjusted cost of capital, then the project should be accepted; however, if the IRR is less than the project's risk-adjusted cost of capital, then the project should be rejected ✓✓✓. Because of the IRR reinvestment rate assumption, when mutually exclusive projects are evaluated the IRR approach can lead to conflicting results from the NPV method. Two basic conditions can lead to conflicts between NPV and IRR: ✔ differences (earlier cash flows in…arrow_forwardDiscuss the four alternative methods for evaluating capital budgeting projects? What is an advantage and disadvantage of each method? Furthermore, the accrual accounting rate of return (AARR) divides an accrual accounting measure of average annual income from a project by an accrual accounting measure of its investment. What are the strengths and weaknesses of the accrual accounting rate-of-return (AARR) method for evaluating long-term projects?arrow_forward1. Which of the following is not true? Group of answer choices The method in which we calculate a project’s Internal Rate of Return (IRR) is called the Discounted Cash Flow approach. The Payback period can be calculated using the discounted (present) values of future cash inflows. The Payback period calculated using this method is what's called the Discounted Payback Period. The Net Present Value is calculated using the present value of the investments and future cash inflows. None of the above (all of the above are correct)arrow_forward
- Which capital budgeting projects are ?preferred اخترأحد الخیارات a. Higher payback period O b. None of the option O c. Average payback period O d. Lower payback period O e. Lower cash inflow projectsarrow_forwardThe net present value (NPV) of a project is positive when the discount rate used is: Group of answer choices equal to the project's internal rate of return (IRR). greater than the project's internal rate of return (IRR). equal to the yield to maturity of the bonds issued to finance the project. Less than the project's internal rate of return (IRR).arrow_forwardCalculate the cash flows for each year. Based on these cash flows and the average project cost of capital, what are the projects NPV, IRR, MIRR, PI, payback, and discounted payback? Do these indicators suggest that the project should be undertaken?arrow_forward
- Calculate the project cash flows for each year. Based on these cash flows and the average project cost of capital, what are the projects NPV, IRR, MIRR, PI, payback, and discounted payback? Do these indicators suggest that the project should be undertaken?arrow_forwardConsider the following information relating to the expected cash flows from two independent projects. The cash flows are expressed in real terms, the nominal discount rate is 10% p.a. and the expected inflation rate is 4% p.a. 1) Calculate the NPV of each of the projects 2). In no more than 6 lines, explain which of the above projects you should select and why?arrow_forwardConsider the cash flows for the following investment projects: (a) For Project A. find the value of X that makes the equivalent annual receiptsequal the equivalent annual disbursement at i = 13%.(b) Would you accept Project Bat i = 15% based on the AE criterion?arrow_forward
- Which one of the following statements is correct? If the initial cost of a project is increased, the net present value of that project will also increase. The net present value is positive when the required return exceeds the internal rate of return. If the internal rate of return equals the required return, the net present value will equal zero. Net present value is equal to an investment's cash inflows discounted to today's dollars.arrow_forwardFor capital budgeting projects like the one depicted in the prior problem, which of the following statements is CORRECT? (Ch. 11) Group of answer choices The lower the required rate of return, the lower the calculated NPV. If a project’s NPV is less than zero, then its IRR must be less than the required rate of return. Generally speaking, risky projects should have very low required rates of return. A relatively high required rate of return should be used to find the NPV of a relatively low risk project. If a project’s NPV is greater than zero, then its IRR must be less than zero.arrow_forwardUnder which one of the capital budgeting, projects is the sum of all present values of all cash inflows minus present value of outflows? а. Post payback period b. Payback period С. Internal rate of return d. Net present value method When evaluating a proposed project under capital budgeting by the net present value method, if the NPV negative, the proposal is should be rejected. Select one: True Falsearrow_forward
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