Concept explainers
a)
To determine:
Introduction:
The difference between the present value of
b)
To determine: Whether the usage of IRR (
Introduction:
Internal rate of return is a method of calculating the rate of return. This calculation does not include the external factors like cost of capital and inflation.
c)
To determine: The internal
Introduction:
Internal rate of return is a method of calculating the rate of return. This calculation does not include the external factors like cost of capital and inflation. IRR is the rate at which the cash flows from the project will be equal to zero.
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Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
- Markoff Products is considering two competing projects, but only one will be selected. Project A requires an initial investment of $42,000 and is expected to generate future cash flows of $6,000 for each of the next 50 years. Project B requires an initial investment of $210,000 and will generate $30,000 for each of the next 10 years. If Markoff requires a payback of 8 years or less, which project should it select based on payback periods?arrow_forwardYou are considering constructing a new plant in a remote wilderness area to process the ore from a planned mining operation. You anticipate that the plant will take a year to build and cost $104 million upfront. Once built, it will generate cash flows of $18 million per year starting two years from today. In 21 years, after its 20th year of operation, the mine will run out of ore and you expect to pay $256 million to shut the plant down and restore the area to its pristine state. Using a cost of capital of 13%: a. What is the NPV of the project? b. Is using the IRR rule reliable for this project? Explain. c. What are the IRRs of this project? a. What is the NPV of the project?arrow_forwardYou own a coal mining company and are considering opening a new mine. The mine itself will cost $120 million to open. If this money is spent immediately, the mine will generate $21 million for the next 10 years. After that, the coal will run out and the site must be cleaned and maintained at environmental standards. The cleaning and maintenance are expected to cost $1.9 million per year in perpetuity. What does the IRR rule say about whether you should accept this opportunity? (Hint: Consider the number of sign changes in the cash flows.) If the cost of capital is 8.2%, what does the NPV rule say? What does the IRR rule say about whether you should accept this opportunity? (Select the best choice below.) The IRR is 10.41%, so accept the opportunity Accept the opportunity because the IRR is greater than the cost of capital. There are twoIRRs, so you cannot use the IRR as a criterion for accepting the opportunity. Reject the opportunity because the IRR is lower than the 8.2%…arrow_forward
- You are considering purchasing a new injection molding machine. This machine will have an estimated service life of 10 years with negligible after-tax salvage value. Its annual net after-tax operating cash flows are estimated to be $60,000. If you expect a 15% rate of return on investment, what would be the maximum amount that you should spend to purchase the injection molding machine?arrow_forwardYour company is considering a new computer system that will initially cost $1 million. It will save $400,000 a year in inventory and receivables management costs. The system is expected to last for five years and will be depreciated using 3-year MACRS. The system is expected to have a salvage value of $50,000 at the end of year 5. The project will require an initial $20,000 investment in net working capital and the marginal tax rate is 40%. The required return is 8%. 0 OCF NCS NWC CFFA Year 1 $373,320 - $1,000,000 $ 20,000 - $1,020,000 $373,320 - Answer: What is the correct vaule for blank ? 2 ($) ($ @ ) 3 4 5 $299,280 $269,640 $ 240,000 ($ @ ) ($ @ ) ($ ® ) With all this, the NPV of the project is ($). Therefore, this project should be accepted. $299,280 $269,640arrow_forwardTropetech Inc. is looking at investing in a production facility that will require an initial investment of $500,000. The facility will have a three-year useful life, and it will not have any salvage value at the end of the project's life. If demand is strong, the facility will be able to generate annual cash flows of $265,000, but if demand turns out to be weak, the facility will generate annual cash flows of only $120,000. Tropetech Inc. thinks that there is a 50% chance that demand will be strong and a 50% chance that demand will be weak. If the company uses a project cost of capital of 13%, what will be the expected net present value (NPV) of this project? O -$38,656 O -$25,013 -$45,478 O -$47,752 Tropetech Inc. could spend $510,000 to build the facility. Spending the additional $10,000 on the facility will allow the company to switch the products they produce in the facility after the first year of operations if demand turns out to be weak in year 1. If the company switches product…arrow_forward
- St. Margaret Beer Co. is looking at investing in a production facility that will require an initial investment of $500,000. The facility will have a three- year useful life, and it will not have any salvage value at the end of the project's life. If demand is strong, the facility will be able to generate annual cash flows of $255,000, but if demand turns out to be weak, the facility will generate annual cash flows of only $135,000. St. Margaret Beer Co. thinks that there is a 50% chance that demand will be strong and a 50% chance that demand will be weak. If the company uses a project cost of capital of 11%, what will be the expected net present value (NPV) of this project? O -$23,476 O -$17,607 O-$12,912 O -$24,650 St. Margaret Beer Co. could spend $510,000 to build the facility. Spending the additional $10,000 on the facility will allow the company to switch the products they produce in the facility after the first year of operations if demand turns out to be weak in year 1. If the…arrow_forwardDelcimer Mining Corportation is considering starting up a new lithium mine. It would cost the company $15,000,000 to build and set up the mine. The mine would produce profits of $1,000,000 in its first year, which would continue at the same $1,000,000 per year for ten years and then start to decline at a 5% per year rate. After 25 years, they expect they would sell the mine for $5,000,000. What would the internal rate of return be for this investment? (Give your answer as a percent rounded to two decimal places.)arrow_forwardJefferson Products Inc. is considering purchasing a new automatic press brake, which costs $320,000 including installation and shipping. The machine is expected to generate net cash inflows of $90,000 per year for 12 years. At the end of 12 years, the book value of the machine will be $0, and it is anticipated that the machine will be sold for $110,000. If the press brake project is undertaken, Jefferson will have to increase its net working capital by $100,000. When the project is terminated in 12 years, there will no longer be a need for this incremental working capital, and it can be liquidated and made available to Jefferson for other uses. Jefferson requires a 9 percent annual return on this type of project and its marginal tax rate is 40 percent. Use Table II and Table IV to answer the questions. Calculate the press brake's net present value. Round your answer to the nearest dollar.$ Is the project acceptable? The project is . What is the meaning of the computed net…arrow_forward
- ACF Manufacturing is considering a 12-year opportunity to invest in a new production facility. The company has estimated that the project will require an initial investment of $70 million and will generate after-tax free cash flows of $11.75 million per year over the twelve-year life of the project. You further estimate that if things go badly in the first two years of the project, you will be able to abandon the project and salvage the equipment and facilities for $52 million (net of taxes). The decision to abandon must be made at time 2 or not at all. If the volatility of returns from the project is 25%, the risk-free interest rate is 3.5%, and the project required return is 14%, what is the value of the project including the option to abandon? Use the Black-Scholes calculator to solve this problem.arrow_forwardYour company is deciding whether to invest in a new machine. The new machine will increase cash flow by $310,000 per year. You believe the technology used in the machine has a 10-year life; in other words, no matter when you purchase the machine, it will be obsolete 10 years from today. The machine is currently priced at $1,650,000. The cost of the machine will decline by $102,000 per year until it reaches $1,140,000, where it will remain. If your required return is 13 percent, calculate the NPV today. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV If your required return is 13 percent, calculate the NPV if you wait to purchase the machine until the indicated year. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6arrow_forwardAll American Telephones Inc. is considering the production of a new cellphone. The project will require an investment of $13 million. If the phone is well received, the project will produce cash flows of $8 million a year for 3 years, but if the market does not like the product, the cash flows will only be $2 million per year. There is a 50% probability of both good and bad market conditions. All AMerican can delay the project a year while it conducts a test to determine whether demand will be strong or weak. The delay will not affect the dollar amounts involved project's investment or its cash flows- only their timing. Because of the anticipated shifts in technology, the 1-year delay means that cash flows will continue only 2 years after the initial investment is made. All-American's WACC is 8%. What action do you recommend?arrow_forward
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