Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Chapter 7, Problem 24P
You have just started your summer Internship, and your boss asks you to review a recent analysis that was done to compare three alternative proposals to enhance the firm’s manufacturing facility. You find that the prior analysis ranked the proposals according to their
Suppose the appropriate cost or capital for each alternative is 10%. Using this information determine the NPV or each project. Which project should the firm choose?
Why is ranking the projects by their IRR not valid in this situation?
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You have just started your summer internship, and your boss asks you to review a recent analysis that was done to compare three alternative proposals to enhance the firm's manufacturing facility. You find that
the prior analysis ranked the proposals according to their IRR, and recommended the highest IRR option, Proposal A. You are concerned and decide to redo the analysis using NPV to determine whether this
recommendation was appropriate. But while you are confident the IRRS were computed correctly, it seems that some of the underlying data regarding the cash flows that were estimated for each proposal was not
included in the report. For Proposal B, you cannot find information regarding the total initial investment that was required in Year 0. And for Proposal C, you cannot find the data regarding additional salvage value
that will be recovered in Year 3. Here is the information you have (in $ millions): -
Suppose the appropriate cost of capital for each alternative is 10%. Using this…
You have just started your summer internship, and your boss asks you to review a recent analysis that was done to compare three alternative proposals to enhance
the firm's manufacturing facility. You find that the prior analysis ranked the proposals according to their IRR, and recommended the highest IRR option, Proposal A.
You are concerned and decide to redo the analysis using NPV to determine whether this recommendation was appropriate. But while you are confident the IRRS
were computed correctly, it seems that some of the underlying data regarding the cash flows that were estimated for each proposal was not included in the report.
For Proposal B, you cannot find information regarding the total initial investment that was required in Year 0. And for Proposal C, you cannot find the data regarding
additional salvage value that will be recovered in Year 3. Here is the information you have (in $ millions):
Proposal
Year 1
Year 2
с
IRR
60.0%
54.3%
53.6%
Year 0
- $100
$30
$0
$37
$153
$206…
You have just started your summer internship, and your boss asks you to review a recent analysis
that was done to compare three alternative proposals to enhance the firm's manufacturing
facility. You find that the prior analysis ranked the proposals according to their IRRs and
recommended the highest IRR option, Proposal A. You are concerned and decided to redo the
analysis using NPV to determine whether this recommendation was appropriate. But while
you are confident the IRRS were computed correctly, it seems that some of the underlying data
regarding the cash flows that were estimated for each proposal were not included in the report.
For Proposal B, you cannot find information regarding the total initial investment that was
required in year 0. And for Proposal C, you cannot find the data regarding additional salvage
value that will be recovered in year 3. Here is the information you have:
Proposal
IRR
Year 0 Year 1
Year 2 Year 3
A
60.0%
-100
30
153
88
B
55.0%
?
0
206
95
C
50.0%
-100…
Chapter 7 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 7.1 - Explain the NPV rule for stand-alone projects.Ch. 7.1 - What does the difference between the cost of...Ch. 7.2 - Prob. 1CCCh. 7.2 - If the IRR rule and the NPV rule lead to different...Ch. 7.3 - Can the payback rule reject projects that have...Ch. 7.3 - Prob. 2CCCh. 7.4 - For mutually exclusive projects, explain why...Ch. 7.4 - What is the incremental RR and what are its...Ch. 7.5 - Prob. 1CCCh. 7.5 - Prob. 2CC
Ch. 7 - Your brother wants to borrow 10,000 from you. He...Ch. 7 - You are considering investing in a start-up...Ch. 7 - You are considering opening a new plant. The plant...Ch. 7 - Your firm is considering the launch of a new...Ch. 7 - Bill Clinton reportedly was paid 15 million to...Ch. 7 - FastTrack Bikes, Inc. is thinking of developing a...Ch. 7 - OpenSeas, Inc. is evaluating the purchase of a new...Ch. 7 - You are CEO of Rivet Networks, maker of ultra-high...Ch. 7 - You are considering an investment in a clothes...Ch. 7 - You have been offered a very long term investment...Ch. 7 - You are considering opening a new plant. The plant...Ch. 7 - Bill Clinton reportedly was paid 15 million to...Ch. 7 - Prob. 13PCh. 7 - Innovation Company is thinking about marketing a...Ch. 7 - You have 3 projects with the following cash flows:...Ch. 7 - You own a coal mining company and are considering...Ch. 7 - Prob. 17PCh. 7 - Prob. 18PCh. 7 - Prob. 19PCh. 7 - Prob. 20PCh. 7 - You are a real estate agent thinking of placing a...Ch. 7 - Prob. 22PCh. 7 - You are deciding between two mutually exclusive...Ch. 7 - You have just started your summer Internship, and...Ch. 7 - Prob. 25PCh. 7 - Prob. 26PCh. 7 - Prob. 27PCh. 7 - Prob. 28PCh. 7 - Prob. 29PCh. 7 - Prob. 30PCh. 7 - Prob. 31PCh. 7 - Prob. 32PCh. 7 - Prob. 33PCh. 7 - Orchid Biotech Company is evaluating several...
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