PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 6, Problem 37PS
Equivalent annual costs We warned that equivalent annual costs should be calculated in real terms. We did not fully explain why. This problem will show you.
Look back to the cash flows for machines A and B (in “The Choice between Long- and Short-Lived Equipment”). The present values of purchase and operating costs are 28.37 (over three years for A) and 21.00 (over two years for B). The real discount rate is 6% and the inflation rate is 5%.
- a. Calculate the three- and two-year level nominal
annuities which have present values of 28.37 and 21.00. Explain why these annuities are not realistic estimates of equivalent annual costs. (Hint: In real life machinery rentals increase with inflation.) - b. Suppose the inflation rate increases to 25%. The real interest rate stays at 6%. Recalculate the level nominal annuities. Note that the ranking of machines A and B appears to change. Why?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
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
%
l
Tyler, Inc., is considering switching to a new production technology. The cost of the required equipment will be $3,764,394 . The discount rate is 13.01 percent. The cash flows that the firm expects the new technology to generate are as follows.
Years
CF
0
$(3,764,394)
1–2
0
3–5
$878,248
6–9
$1,534,992
Compute the payback and discounted payback periods for the project. (Round answers to 2 decimal places, e.g. 15.25.)
The payback for the project is ............
years, and the discounted payback period is...........
years.
What is the NPV for the project? Should the firm go ahead with the project? (Round answer to 2 decimal places, e.g. 15.25.)
The NPV of the project is $
, and using the NPV rule the project should be
rejected/ accepted
.
What is the IRR, and what would be the decision based on the IRR? (Round answer to 2 decimal places, e.g. 15.25.)
The IRR of the project is
%, and using the IRR rule the…
A potential project provides the following:
Initial Investment = 36,101
Annual cash Flows = 12,101
period= 5 years
What is the discount rate If NPV = 0?
Answer in the format:
#0.00
Answer as a percentage but without the % sign
Example 0 0651 is entered as 6.51
Do not round intermediary calculations. Use full precision of your calculator or Excel.
Do not include commas or dollar signs.
Round properly to two decimal places
Example: .157835 would be .16
Example: 2.3491 would be entered 2.35
HINT: Be sure your answer is percentage
Chapter 6 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 6 - Cash flows Which of the following should be...Ch. 6 - Cash flows Reliable Electric, a major Ruritanian...Ch. 6 - Prob. 3PSCh. 6 - Prob. 4PSCh. 6 - Real and nominal flows Mr. Art Deco will be paid...Ch. 6 - Real and nominal flows Restate the net cash flows...Ch. 6 - Real and nominal flows Guandong Machinery is...Ch. 6 - Working capital Each of the following statements...Ch. 6 - Prob. 9PSCh. 6 - Project NPV Better Mousetraps research...
Ch. 6 - Project NPV A widget manufacturer currently...Ch. 6 - Project NPV Marsha Jones has bought a used...Ch. 6 - Project NPV United Pigpen is considering a...Ch. 6 - Project NPV Imperial Motors is considering...Ch. 6 - Project NPV and IRR A project requires an initial...Ch. 6 - Taxes and project NPV In the International Mulch...Ch. 6 - Depreciation and project NPV Suppose that Sudbury...Ch. 6 - Depreciation and project NPV Ms. T. Potts, the...Ch. 6 - Prob. 20PSCh. 6 - Prob. 21PSCh. 6 - Prob. 22PSCh. 6 - Equivalent annual cash flow Look at Problem 22...Ch. 6 - Equivalent annual cash flow Deutsche Transport can...Ch. 6 - Prob. 25PSCh. 6 - Mutually exclusive investments and project lives...Ch. 6 - Mutually exclusive investments and project lives...Ch. 6 - Mutually exclusive investments and project lives....Ch. 6 - Mutually exclusive investments and project lives...Ch. 6 - Mutually exclusive investments and project lives...Ch. 6 - Replacement decisions Machine C was purchased five...Ch. 6 - Replacement decisions Hayden Inc. has a number of...Ch. 6 - Replacement decisions. You are operating an old...Ch. 6 - Replacement decisions. A forklift will last for...Ch. 6 - The cost of excess capacity The presidents...Ch. 6 - Effective tax rates One measure of the effective...Ch. 6 - Equivalent annual costs We warned that equivalent...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- 10) Which of the following two options for purchasing an equipment has a lower net present cost? Assume a discount rate of 0.05. (Hint: Use Excel for easier calculations.) a. Initial payment of $2000, then $550 monthly for4 months. b. Initial payment of $3000, then $200 monthly for 5 months. 11) Why should a higher discount rate be applied to an investment with a higher risk?arrow_forwardAn investment has an installed cost of $787,350. The cash flows over the four-year life of the investment are projected to be $312,615, $304,172, $245,367, and $229,431. a. If the discount rate is zero, what is the NPV? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) b. If the discount rate is infinite, what is the NPV? (A negative answer should be indicated by a minus sign. Do not round intermediate calculationsarrow_forwardTyler, Inc., is considering switching to a new production technology. The cost of the required equipment will be $3,727,533 . The discount rate is 12.86 percent. The cash flows that the firm expects the new technology to generate are as follows. Years CF 0 $(3,727,533) 1–2 0 3–5 $874,667 6–9 $1,546,005 a. Compute the payback and discounted payback periods for the project. b. What is the NPV for the project? Should the firm go ahead with the project? c. What is the IRR, and what would be the decision based on the IRR?arrow_forward
- An investment has an installed cost of $565,382. The cash flows over the four-year life of the investment are projected to be $194,584, $238,318, $186,674, and $154,313. If the discount rate is zero, what is the NPV? Note: Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32. If the discount rate is infinite, what is the NPV? Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32. At what discount rate is the NPV just equal to zero? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.arrow_forwardYou solve present value problems on a financial calculator just like you do future value problems. For the example we just examined (the present value of $1,000 to be received in three years at 15 percent), you would do the following: Enter 3. 15 1,000 I/Y PMT PV FV Solve for -657.52 Notice that the answer has a negative sign; as we discussed earlier, that's because it represents an out- flow today in exchange for the $1,000 inflow later.arrow_forwardBlanda Incorporated management is considering investing in two alternative production systems. The systems are mutually exclusive, and the cost of the new equipment and the resulting cash flows are shown in the accompanying table. If the firm uses a 7 percent discount rate for their production systems. Year System 1 System 2 0 -$12,800 -$42,700 1 12,800 32,300 2 12,800 32,300 3 12,800 32,300 What are the payback periods for production systems 1 and 2? (Round answers to 2 decimal places, e.g. 15.25.) Payback period of System 1 is years and Payback period of System 2 is years If the systems are mutually exclusive and the firm always chooses projects with the lowest payback period, in which system should the firm invest? The firm should invest in .system 1 system 2arrow_forward
- A project has the following estimated data: Price = $46 per unit; variable costs = $31 per unit; fixed costs $19,000; required return = 15 percent; Initial investment $18,000; life = six years. a. Ignoring the effect of taxes, what is the accounting break-even quantity? (Do not round Intermedlate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the cash break-even quantity? (Do not round Intermedlate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. What is the financial break-even quantity? (Do not round Intermedlate calculations and round your answer to 2 decimal places, e.g., 32.16.) d. What is the degree of operating leverage at the financial break-even level of output? (Do not round Intermedlate calculations and round your answer to 3 decimal places, e.g., 32.161.) Accounting break-even quantity a. b. Cash break-even quantity с. Financial break-even quantity d. DOL eg EA9F9D41-D35...jpeg 8A1B4474-4751..jpeg…arrow_forward2. 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.arrow_forwardThe Borstal Company has to choose between two machines that do the same job but have different lives. The two machines have the following costs: Year Machine A Machine B $42,500 10,500 10,500 10,500 + replace $52,500 9,000 9,000 9,000 9,000 + replace 4 These costs are expressed in real terms. Suppose that technological change is expected to reduce costs by 10% per year. There will be new machines in year 1 that cost 10% less to buy and operate than A and B. In year 2, there will be a second crop of new machines incorporating a further 10% reduction, and so on. Suppose you are Borstal's financial manager. If you had to buy one or the other machine and rent it to the production manager for that machine's economic life, what annual rental payment would you have to charge at the end of the first year and how would this alter in subsequent years given the expected technological changes? Assume a 9% real discount rate and ignore E taxes. (Do not round intermediate calculations. Enter your…arrow_forward
- A project has the following estimated data: Price = $56 per unit; variable costs = $35 per unit; fixed costs = $18,500; required return = 8 percent; initial investment = $45,000; life = five years. a. Ignoring the effect of taxes, what is the accounting break-even quantity? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the cash break-even quantity? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. What is the financial break-even quantity? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) d. What is the degree of operating leverage at the financial break-even level of output? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.) a. Accounting break-even quantity b. Cash break-even quantity c. Financial break-even quantity d. DOLarrow_forwardIf the present value of the expected net cash flows from a machine, discounted at 10%, exceeds the amount to be invested, what can you say about the investment’s expected rate of return? What can you say about the expected rate of return if the present value of the net cash flows, discountedat 10%, is less than the investment amount?arrow_forwardPortland Savings and Loan is considering new computersoftware, which, because of installation and training cost,will have an unusual pattern of net receipts. The expected receiptsare: $20,000 in year 1, nothing in the next yea r, $30,000 in year 3,and $50,000 in year 4. At an interest rate of 6% what is the presentvalue of these receipts?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education
Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:9780134897264
Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...
Finance
ISBN:9780077861759
Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:McGraw-Hill Education
Capital Budgeting Introduction & Calculations Step-by-Step -PV, FV, NPV, IRR, Payback, Simple R of R; Author: Accounting Step by Step;https://www.youtube.com/watch?v=hyBw-NnAkHY;License: Standard Youtube License