(1)
To compute: The
Introduction: The financial statements of a company include the
(2)
To compute: The IRR, payback period, and NPV at cash breakeven.
Introduction: The financial statements of a company include the balance sheet, income statement, and cash flow statement. All these statements help the internal and external users of financial statements help in analyzing and concluding the financial position of the respective company.
(3)
To compute: The IRR, payback period, and NPV at the breakeven output.
Introduction: The financial statements of a company include the balance sheet, income statement, and cash flow statement. All these statements help the internal and external users of financial statements help in analyzing and concluding the financial position of the respective company.
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Corporate Finance
- A firm evaluates all of its projects by applying the NPV decision rule. A project under consideration has the following cash flows: Year Cash Flow 0 –$ 28,900 1 12,900 2 15,900 3 11,900 What is the NPV for the project if the required return is 11 percent? At a required return of 11 percent, should the firm accept this project? What is the NPV for the project if the required return is 25 percent?arrow_forwardWhich of the following describes the NPV decision rule? Accept if the cost of the project is recouped within 3 years. Accept if the PV of the cash inflows of the project divided by the absolute value of the cost of the project is greater than one. Accept if the PV of the cash inflows from the project minus the cost of the project is greater than zero Accept if the average net income from the project divided by the average book value is greater than the target required Accept if the rate of return earned on the project is greater than the required return for the project.arrow_forwardGalaxy Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the shorter payback, some value may be forgone. How much value will be lost in this instance? Note that under some conditions choosing projects on the basis of the shorter payback will not cause value to be lost. WACC: 11.00% Year CFS CFL O $53.31 O $3.50 O $63.57 O $43.16 0 -$950 -$2,100 1 2 $500 $800 $400 $800 3 $0 $800 4 $0 $1,000arrow_forward
- 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 $148,820, respectively. a. If the discount rate is zero, what is the NPV? (Do not round intermediate calculations.) b. If the discount rate is infinite, what is the NPV? (A negative answer should be indicated by a minus sign.) c. At what discount rate is the NPV just equal to zero? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. NPV b. NPV c. IRR Q % larrow_forwardYou have determined the profitability of a planned project by finding the present value of all the cash flows from that project. Which of the following would cause-the project to look less appealing in terms of the present value of those cash flows? O The discount rate decreases. The cash flows are extended over a longer period of time, but the total amount remains the same. O The discount rate increases. O Statements B and C are correct. O Statements A and B are correct.arrow_forwardA firm evaluates all of its projects by applying the NPV decision rule. A project under consideration has the following cash flows: Year Cash Flow 0 –$ 27,300 1 11,300 2 14,300 3 10,300 What is the NPV for the project if the required return is 10 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) At a required return of 10 percent, should the firm accept this project? multiple choice 1 Yes No What is the NPV for the project if the required return is 26 percent? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) At a required return of 26 percent, should the firm accept this project? multiple choice 2 Yes Noarrow_forward
- a. Find the incremental NPV for the Increased investment. (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount. Enter your answer in thousands.) b. At what level of sales will accounting profits be unchanged if the firm makes the new investment? Assume the equipment receives the same straight-line depreciation treatment as in the original example. (Hint: Focus on the project's incremental effects on fixed and variable costs.) (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount. Enter your answer in thousands.) c. What is the NPV break-even point in total sales if the firm invests in the new equipment? (Negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to the nearest whole dollar amount. Enter your answer in thousands.) d. If the Blooper project operates at accounting break-even, will net present value be positive or negative?arrow_forwardModified internal rate of return (MIRR) The IRR evaluation method assumes that cash flows from the project are reinvested at the same rate equal to the IRR. However, in reality the reinvested cash flows may not necessarily generate a return equal to the IRR. Thus, the modified IRR approach makes a more reasonable assumption other than the project’s IRR. Consider the following situation: Grey Fox Aviation Company is analyzing a project that requires an initial investment of $2,225,000. The project’s expected cash flows are: Year Cash Flow Year 1 $325,000 Year 2 –100,000 Year 3 475,000 Year 4 475,000 Q1. Grey Fox Aviation Company’s WACC is 9%, and the project has the same risk as the firm’s average project. Calculate this project’s modified internal rate of return (MIRR): 33.79% 29.18% -11.55% 27.65% If Grey Fox Aviation Company’s managers select projects based on the MIRR criterion, they should Q2. ______ this…arrow_forward4. Modified internal rate of return (MIRR) The IRR evaluation method assumes that cash flows from the project are reinvested at the same rate equal to the IRR However, in reality the reinvested cash flows may not necessarily generate a return equal to the IRR. Thus, the modified IRR approach makes a more reasonable assumption other than the project's IRR Consider the following situation: Cold Goose Metal Works Inc. is analyzing a project that requires an initial investment of $600,000. The project's expected cash flows are: Year Year 1 Year 2 Year 3 Year 4 Cold Goose Metal Works Inc.'s WACC is 7%, and the project has the same risk as the firm's average project. Calculate this project's modified internal rate of return (MIRR): 17.50% 14.00% Cash Flow $350,000 -100,000 450,000 400,000 19.25%arrow_forward
- Which of the following would cause a project to have a lower net present value, thereby making the project less appealing? A. The discount rate increases B. The cash flows are extended over a longer period of time. C. The investment cost decreases without affecting the expected income and life of the project. d. The cash flows are accelerated and the project life is correspondingly shortened.arrow_forwardProblems with the IRR method Acme Oscillators is considering an investment project that has the following rather unusual cash flow pattern:. a. Calculate the project's NPV at each of the following discount rates: 0%, 5%, 10%, 20%, 30%, 40%, 50%. b. What do the calculations tell you about this project's IRR? The IRR rule tells managers to invest if a project's IRR is greater than the cost of capital. If Acme Oscillators' cost of capital is 8%, should the company accept or reject this investment? c. Notice that this project's greatest NPVS come at very high discount rates. Can you provide an intuitive explanation for that pattern? d. If Acme Oscillators' cost of capital is 8%, should the company accept or reject this investment based on MIRR? a. Calculate the NPV at the following discount rates for this investment: 0%, 5%, 10%, 20%, 30%, 40%, 50%. The NPV at 0% is $ (Round to the nearest dollar.) Data table (Click on the following icon in order to copy its contents into a spreadsheet.)…arrow_forwardWhat information does the payback period provide? Suppose you are evaluating a project with the expected future cash inflows shown in the following table. Your boss has asked you to calculate the project’s net present value (NPV). You don’t know the project’s initial cost, but you do know the project’s regular, or conventional, payback period is 2.50 years. Year Cash Flow Year 1 $350,000 Year 2 $500,000 Year 3 $450,000 Year 4 $425,000 If the project’s weighted average cost of capital (WACC) is 8%, the project’s NPV (rounded to the nearest dollar) is: $312,620 $295,253 $277,885 $347,356 Which of the following statements indicate a disadvantage of using the regular payback period (not the discounted payback period) for capital budgeting decisions? Check all that apply. The payback period is calculated using net income instead of cash flows. The payback period does not take the project’s entire life into account.…arrow_forward