Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
11th Edition
ISBN: 9780077861759
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 5, Problem 10CQ
| Year | Project A | Project B |
| 0 | –$1 .000 | $2.000 |
| 1 | CIA | C IB |
| 2 | C2A | C2B |
| 3 | C3A | C3B |
a. If the cash flows from the projects are identical, which of the two projects would have a. higher IRR? Why?
b. If CIB = 2C1A, C2B = 2C2A, and C3B = 2C3A, then is IRRA = IRRB?
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Consider the following two projects:
Cash flows
Project A
Project B
C0οΏ½0
β$ 240
β$ 240
C1οΏ½1
100
123
C2οΏ½2
100
123
C3οΏ½3
100
123
C4οΏ½4
100
Β
a.Β If the opportunity cost of capital is 8%, which of these two projects would you accept (A, B, or both)?
b.Β Suppose that you can choose only one of these two projects. Which would you choose? The discount rate is still 8%.
c.Β Which one would you choose if the cost of capital is 16%?
d.Β What is the payback period of each project?
e.Β Is the project with the shortest payback period also the one with the highest NPV?
f.Β What are the internal rates of return on the two projects?
g.Β Does the IRR rule in this case give the same answer as NPV?
h.Β If the opportunity cost of capital is 8%, what is the profitability index for each project?
i.Β Is the project with the highest profitability index also the one with the highest NPV?
j.Β Which measure should you use to choose between the projects?
Consider the following two projects:
Project
Year 0
Year 1
Year 2
Year 3
Year 4
Discount
Cash Flow Cash Flow Cash Flow Cash Flow Cash Flow
Rate
A
- 100
40
50
60
N/A
0.13
B
- 73
30
30
30
30
0.13
The net present value (NPV) of project B is closest to:
O A. 17.9
Π. 20.3
C. 40.6
O D. 16.2
O O
Consider projects A and B with the following cash flows:
Β
Β
Β
C0
Β
C1
Β
C2
Β
C3
A
Β
β
$
27
Β
Β
+
$
16
Β
Β
+
$
16
Β
Β
+
$
16
Β
B
Β
β
Β
52
Β
Β
+
Β
27
Β
Β
+
Β
27
Β
Β
+
Β
27
Β
Β
Β
a-1. What is the NPV of each project if the discount rate is 10%? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
a-2. Which project has the higher NPV?
b-1. What is the profitability index of each project? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
b-2. Which project has the higher profitability index?
c. Which project is most attractive to a firm that can raise an unlimited amount of funds to pay for its investment projects?
d. Which project is most attractive to a firm that is limited in the funds it can raise?
Chapter 5 Solutions
Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 5 - Payback Period and Net Present Value If a project...Ch. 5 - Net Present Value Suppose a project has...Ch. 5 - Comparing Investment Criteria Define each of the...Ch. 5 - Payback and Internal Rate of Return A project has...Ch. 5 - International Investment Projects In March 2014,...Ch. 5 - Capital Budgeting Problems What are some of the...Ch. 5 - Prob. 7CQCh. 5 - Prob. 8CQCh. 5 - Net Present Value versus Profitability Index...Ch. 5 - Internal Rate of Return Projects A and B have the...
Ch. 5 - Net Present Value You are evaluating Project A and...Ch. 5 - Modified Internal Rate of Return One of the less...Ch. 5 - Net Present Value It is sometimes stated that the...Ch. 5 - Prob. 14CQCh. 5 - Calculating Payback Period and NPV Maxwell...Ch. 5 - Calculating Payback An investment project provides...Ch. 5 - Calculating Discounted Payback An investment...Ch. 5 - Calculating Discounted Payback An investment...Ch. 5 - Prob. 5QPCh. 5 - Calculating IRR Compute the internal rate of...Ch. 5 - Calculating Profitability Index Bill plans to open...Ch. 5 - Calculating Profitability Index Suppose the...Ch. 5 - Cash Flow Intuition A project has an initial cost...Ch. 5 - Prob. 10QPCh. 5 - NPV versus IRR Consider the following cash flows...Ch. 5 - Problems with Profitability Index The Coris...Ch. 5 - Prob. 13QPCh. 5 - Comparing Investment Criteria Wii Brothers, a game...Ch. 5 - Profitability Index versus NPV Hanmi Group, a...Ch. 5 - Comparing Investment Criteria Consider the...Ch. 5 - Comparing Investment Criteria The treasurer of...Ch. 5 - Comparing Investment Criteria Consider the...Ch. 5 - Prob. 19QPCh. 5 - NPV and Multiple IRRs You are evaluating a project...Ch. 5 - Payback and NPV An investment under consideration...Ch. 5 - Multiple IRRs This problem is useful for testing...Ch. 5 - NPV Valuation The Yurdone Corporation wants to set...Ch. 5 - Calculating IRR The Utah Mining Corporation is set...Ch. 5 - Prob. 25QPCh. 5 - Calculating IRR Consider two streams of cash...Ch. 5 - Calculating Incremental Cash Flows Darin Clay, the...Ch. 5 - Prob. 28QPCh. 5 - Prob. 1MCCh. 5 - Seth Bullock, the owner of Bullock Gold Mining, is...
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