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 33P
a)
Summary Introduction
To determine: IRR of each investment.
Introduction:
b)
Summary Introduction
To determine: The
Introduction:
The difference between the present value of
c)
Summary Introduction
To discuss: The best property to be chosen by K Company.
d)
Summary Introduction
To discuss: The reason why profitability index cannot be used in K Company’s budget of $12,000,000 instead and properties that can be used under this scenario.
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Kaimalino Properties (KP) is evaluating six real estate investments. Management plans to buy the
properties today and sell them five years from today. The following table summarizes the initial cost and
the expected sale price for each property, as well as the appropriate discount rate based on the risk of
each venture.
Expected Sale
Cost Today Discount Rate (%) Price in Year 5
$18,000,000
Project
$3,000,000
Mountain Ridge
15
75,500,000
50,000,000
35,500,000
10,000,000
Ocean Park Estates
15,000,000
9,000,000
6,000,000
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Seabreeze
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Green Hills
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West Ranch
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KP has a total capital budget of $18,000,000 to invest in properties.
a. What is the IRR of each investment?
b. What is the NPV of each investment?
c. Given its budget of $18,000,000, which properties should KP choose?
d. Explain why the profitability index method could not be used if KP's budget were $12,000,000 instead.
Which properties should KP choose in this case?
Fill in the IRR of…
You are a financial analyst for the Hittle Company. The director of capital budgeting has asked you to
analyze six proposed capital investments. Each project has a cost of $1,000, and the required rate of
return for each is 12%, determine for each project (a) the payback period, (b) the net present value,
(c) the profitability index, and (d) the internal rate of return. Assume under MACRS the asset falls in
the three-year property class and that the corporate tax rate is 25 percent. You are limited to a
maximum expenditure of $3000 only for this capital budgeting period. Which projects you will
accept and why? Justify your suggestions
Project A
Project B
Project C
Project D
Project E
Project F
Investment
-1000
-1000
-1000
-1000
-1000
-1000
1
150
200
250
800
900
1000
2
350
300
250
350
300
200
3
400
500
600
200
150
100
4
700
650
600
200
150
50
12 Capital Budgeting and Estimating Cash Flows
Table 12.2
PROPERTY CLASS
RECOVERY
YEAR
MACRS depreciation
percentages
3-YEAR
5-YEAR
7-YEAR
10-YEAR…
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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