Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Chapter 9, Problem 14CRCT
a. Calculate the
b. Calculate the NPV of the project using the single future value calculated in the previous step and the initial outlay. It is easy to verify that you will gel the same NPV as in your original calculation only if you use the required return as the reinvestment rate in the previous step.
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Mathematically, we can determine the rate of return for a given project’s cash flow series by identifying an interest rate that equates the present worth of its cash flows to zero.
Select one:
True
False
and explain
1. Which of the following is not true? Group of answer choices The method in which we calculate a project’s Internal Rate of Return (IRR) is called the Discounted Cash Flow approach. The Payback period can be calculated using the discounted (present) values of future cash inflows. The Payback period calculated using this method is what's called the Discounted Payback Period. The Net Present Value is calculated using the present value of the investments and future cash inflows. None of the above (all of the above are correct)
which of the following statement is true>?
1. return on equity is the ratio of total assets to total net income
2. one must know the discount rate to compute the npv of a project but one can compute the IRR without referring to the discount rate.
3. there will always be one IRR regardless of cash flows
4. one must know the discount rate to compute the IRR of a project but one can compute the NPV without referring to the discount rate
5. payback accounts for time value of money
Chapter 9 Solutions
Fundamentals of Corporate Finance
Ch. 9.1 - Prob. 9.1ACQCh. 9.1 - Prob. 9.1BCQCh. 9.2 - Prob. 9.2ACQCh. 9.2 - Why do we say that the payback period is, in a...Ch. 9.3 - Prob. 9.3ACQCh. 9.3 - What advantage(s) does the discounted payback have...Ch. 9.4 - What is an average accounting rate of return...Ch. 9.4 - What are the weaknesses of the AAR rule?Ch. 9.5 - Prob. 9.5ACQCh. 9.5 - Is it generally true that an advantage of the IRR...
Ch. 9.6 - What does the profitability index measure?Ch. 9.6 - How would you state the profitability index rule?Ch. 9.7 - Prob. 9.7ACQCh. 9.7 - If NPV is conceptually the best procedure for...Ch. 9 - Prob. 9.1CTFCh. 9 - Prob. 9.2CTFCh. 9 - Prob. 9.3CTFCh. 9 - Prob. 9.4CTFCh. 9 - What is a benefitcost ratio?Ch. 9 - Prob. 9.7CTFCh. 9 - Prob. 1CRCTCh. 9 - Net Present Value [LO1] Suppose a project has...Ch. 9 - Prob. 3CRCTCh. 9 - Prob. 4CRCTCh. 9 - Prob. 5CRCTCh. 9 - Net Present Value [LO1] Concerning NPV: a....Ch. 9 - Prob. 7CRCTCh. 9 - Profitability Index [LO7] Concerning the...Ch. 9 - Payback and Internal Rate of Return [LO2, 5] A...Ch. 9 - Prob. 10CRCTCh. 9 - Capital Budgeting Problems [LO1] What difficulties...Ch. 9 - Prob. 12CRCTCh. 9 - Modified Internal Rate of Return [LO6] One of the...Ch. 9 - Net Present Value [LO1] It is sometimes stated...Ch. 9 - Internal Rate of Return [LO5] It is sometimes...Ch. 9 - Calculating Payback [LO2] What is the payback...Ch. 9 - Calculating Payback [LO2] An investment project...Ch. 9 - Calculating Payback [LO2] Siva, Inc., imposes a...Ch. 9 - Calculating Discounted Payback [LO3] An investment...Ch. 9 - Calculating Discounted Payback [LO3] An investment...Ch. 9 - Calculating AAR [LO4] Youre trying to determine...Ch. 9 - Calculating IRR [LO5] A firm evaluates all of its...Ch. 9 - Calculating NPV [LO1] For the cash flows in the...Ch. 9 - Calculating NPV and IRR [LO1, 5] A project that...Ch. 9 - Calculating IRR [LO5] What is the IRR of the...Ch. 9 - Prob. 11QPCh. 9 - NPV versus IRR [LO1, 5] Garage, Inc., has...Ch. 9 - Prob. 13QPCh. 9 - Problems with IRR [LO5] Light Sweet Petroleum,...Ch. 9 - Prob. 15QPCh. 9 - Problems with Profitability Index [LO1, 7] The...Ch. 9 - Comparing Investment Criteria [LO1, 2, 3, 5, 7]...Ch. 9 - NPV and Discount Rates [LO1] An investment has an...Ch. 9 - MIRR [L06] RAK Corp. is evaluating a project with...Ch. 9 - Prob. 20QPCh. 9 - Prob. 21QPCh. 9 - Cash Flow Intuition [LO1, 2] A project has an...Ch. 9 - Payback and NPV [LO1, 2] An investment under...Ch. 9 - Prob. 24QPCh. 9 - NPV Valuation [LO1] The Yurdone Corporation wants...Ch. 9 - Problems with IRR [LO5] A project has the...Ch. 9 - Problems with IRR [LO5] McKeekin Corp. has a...Ch. 9 - Prob. 28QPCh. 9 - Prob. 1MCh. 9 - Prob. 2MCh. 9 - Bullock Gold Mining Seth Bullock, the owner of...
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- Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. O a. If a project's IRR is positive, then its NPV must also be positive. O b. A project's regular IRR is found by compounding the cash inflows at the WACC to find the present value (PV), then discounting the TV to find the IRR. O c. A project's IRR is the discount rate that causes the PV of the inflows to equal the project's cost. O d. If a project's IRR is smaller than the WACC, then its NPV will be positive. O e. A project's regular IRR is found by compounding the initial cost at the WACC to find the terminal value (TV), then discounting the TV at the WACC.arrow_forwardWhat are the reinvestment rate assumptions for the NPV and the IRR? A.IRR: Risk Free Rate NPV: WACC B.IRR: The IRR itself NPV: WACC C.The cash flows generated by the project are not assumed to be reinvested. So they will not earn a rate of return. D.IRR: Risk free rate NPV: Risk free Rate E. IRR:WACC NPV: WACCarrow_forwardNet Present Value Suppose a project has conventional cash flows and a positive NPV. What do you know about its payback? Its discounted payback? Its profitability index? Its IRR? Explain.arrow_forward
- True or False A project will have multiple internal rates of return if its future net cash flows alternate between negative and positive values.arrow_forwardIf a project with conventional cash flows has an IRR equal to the required return, then: O The profitability index is one. O The IRR must be zero. O The project should be accepted, as the NPV is greater than zero. O The payback period is less than the maximum acceptable period. The NPV is negative.arrow_forwardQ. A positive NPV forecast for a new project is reliable only if it is based on Multiple Choices: - forecasts of cash flows. - identifiable sources of economic rents. - Michael Porter's theories. - results from Monte Carlo analysis.arrow_forward
- Whenever the present value of the project is greater than the initial cash outlay then both the NPV and PI are positive. Select one: True Falsearrow_forwardIf a project has a positive net present value, then which of the following statements are correct? I. The present value of all cash inflows must equal the costs of the project. The IRR is equal to the required rate of return. II. A increase in the project's initial cost will cause the project to have a higher positive NPV. III. Any delay in receiving the projected cash inflows will cause the project to have a higher positive NPV. IV. IRR must equal zero. Only II Only III All None of themarrow_forwardWhich of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. a. If a project's IRR is greater than its WACC, then the MIRR will be greater than the IRR. b. If a project's IRR is greater than its WACC, then the MIRR will be less than the IRR. c. A project's MIRR is always greater than its regular IRR. d. To find a project's MIRR, we compound cash inflows at the IRR and then discount the terminal value back to t = 0 at the WACC. e. A project's MIRR is always less than its regular IRR.arrow_forward
- Which one of the following statements is correct? If the initial cost of a project is increased, the net present value of that project will also increase. The net present value is positive when the required return exceeds the internal rate of return. If the internal rate of return equals the required return, the net present value will equal zero. Net present value is equal to an investment's cash inflows discounted to today's dollars.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: United Fried Cheese Co. is analyzing a project that requires an initial investment of $2,750,000. The project's expected cash flows are: Year Year 1 Cash Flow $375,000 Year 2 -$125,000 Year 3 Year 4 $400,000 $475,000 United Fried Cheese Co.'s WACC is 10%, and the project has the same risk as the firm's average project. Calculate this project's modified internal rate of return (MIRR). ○ -16.10% -19.32% -15.29% ○ -14.49% If United Fried Cheese Co.'s managers select projects based on the MIRR criterion, they should this independent project.arrow_forwardWhich of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. Select one: a. The lower the WACC used to calculate it, the lower the calculated NPV will be. b. If a project's NPV is greater than zero, then its IRR must be less than zero. c. The NPV of a relatively low-risk project should be found using a relatively high WACC. d. A project's NPV is found by compounding the cash inflows at the IRR to find the terminal value (TV), then discounting the TV at the WACC. e. If a project's NPV is less than zero, then its IRR must be less than the WACC.arrow_forward
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