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
expand_more
expand_more
format_list_bulleted
Concept explainers
Textbook Question
Chapter 9, Problem 6CRCT
a. Describe how NPV is calculated, and describe the information this measure provides about a sequence of cash flows. What is the NPV criterion decision rule?
b. Why is NPV considered a superior method of evaluating the cash flows from a project? Suppose the NPV for a project’s cash flows is computed to be $2,500. What does this number represent with respect to the firm’s shareholders?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
be appropriate? Explain.
8.4 Average Accounting Return Concerning AAR:
LO 2
Describe how the average accounting return is usually calculated and
describe the information this measure provides about a sequence of
cash flows. What is the AAR criterion decision rule?
a.
b.
What are the problems associated with using the AAR as a means of
evaluating a project's cash flows? What underlying feature of AAR is
most troubling to you from a financial perspective? Does the AAR
have any redeeming qualities?
have any redeeming qualities?
LO 4
8.5 Net Present Value Concerning NPV:
Describe how NPV is calculated and describe the information this
measure provides about a sequence of cash flows. What is the NPV
criterion decision rule?
a.
Why is NPV considered to be a superior method of evaluating the cash
flows from a project? Suppose the NPV for a project's cash flows is
computed to be $2,500. What does this number represent with respect
to the firm's shareholders?
b.
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...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Which decision rule assumes that project cash flows are reinvested at the firm's weighted average cost of capital (WACC)? Question 8 options: NPV IRR PBarrow_forwardQ 2. Suppose an investment has conventional cash flows with positive NPV. How would it impact your decision based on capital budgeting techniques mentioned below? i. Profitability index (PI) ii. Internal Rate of Return (IRR) iii. Payback Period (PBP)arrow_forwardWhat is Computron’s free cash flow (FCF)? What are Computron’s “net uses” of its FCF?arrow_forward
- 19. All else being equal, a company would choose to invest in a capital asset if which of the following is true?⦁ If the payback period equals the amount invested⦁ If the expected accounting rate of return is less than the required rate of return⦁ If the expected accounting rate of return is greater than the required rate of return⦁ If the average amount invested is equal to the net cash inflowsarrow_forwardI. If there is a positive NPV, IRR is higher than the cost of capital.II. If annual net cash inflow is equal to the cost of investment, then, NPV is zero. A• FF B• TF C• TT D• FTarrow_forward20. Which of the following statement 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 has normal cash flows and its IRR exceeds its cost of capital, then the project's NPV must be positive. B. The IRR calculation implicitly assumes that cash flows are withdrawn from the business rather than being reinvested in the business. C. The IRR calculation implicitly assumes that all cash flows are reinvested at the cost of capital. D. If Project A has a higher IRR than project B, then Project A must also have a higher NPV.arrow_forward
- The internal rate of return method assumes that the cash flows over the life of the project are reinvested ata. the risk-free rate.b. the firm's cost of capital.c. the computed internal rate of return.d. the market capitalization rate.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_forward1. Using the problem above, how much is the cash investment of PA RIN? 2. Using the same problem, how much is the total assets?arrow_forward
- When considering the discount rate to use for discounting cash flows of a company project, we should use the average of WACC and the marginal cost of capital. T/F?arrow_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_forwardThe net present value (NPV) method estimates how much a potential project will contribute to Business ethics/Shareholders Wealth/Employee Benefits, and it is the best selection criterion. The Smaller/Larger the NPV, the more value the project adds; and added value means a Higher/Larger stock price. In equation form, the NPV is defined as: CFt is the expected net cash flow at Time t, r is the project's risk-adjusted cost of capital, N is its life, and cash outflows are treated as negative cash flows. The NPV calculation assumes that cash inflows can be reinvested at the project's risk-adjusted RD/RS/WACC. When the firm is considering independent projects, if the project's NPV exceeds zero the firm should Accept/Reject the project. When the firm is considering mutually exclusive projects, the firm should accept the project with the Lowest Positive/Lowest Negative/Highest Postive/ Highest Negative NPV.Quantitative Problem: Bellinger Industries is considering two projects for inclusion…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
Capital Budgeting Introduction & Calculations Step-by-Step -PV, FV, NPV, IRR, Payback, Simple R of R; Author: Accounting Step by Step;https://www.youtube.com/watch?v=hyBw-NnAkHY;License: Standard Youtube License