Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 5, Problem 6PS
The opportunity cost of capital is 8%. Suppose you can undertake Alpha or Beta, but not both. Use the IRR rule to make the choice. (Hint: What’s the incremental investment in Alpha?)
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Compute the Profitability Index (PI) for each project?
Project A
Project B
Profitability Index (PI)
5- In light of your answers above, suppose that these two projects might be mutually exclusive or independent. According to these two assumptions, fill in the blanks in the table below with the suitable answer:
Points
Investment Criteria
If A and B are mutually exclusive, then I would select
If A and B are independent, then I would select
PBP
NPV
IRR
PI
The blue curve (labeled "L") depicts the NPV for a project with larger cash flows later of -$1,000, $100, $300, $400, and $675. The red curve (labeled "S") depicts the NPV for a project with larger cash flows sooner of -$1,000, $500, $400, $300, and $100. Drag on the graph either left or right to
change the cost of capital interest rate at which the NPV is evaluated for the two projects.
NPV ($)
500-
400
300
200-
100.40100-
78.82
0
-100-
Project S: NPV = CF₁+N CF₁
-=1 (1+r)
N CF₂
Project L: NPV = CF₁ + Σ = 1 (1+r) ²
+ ΣΜ = = -S1, 000 +
²
L
¡=-$1,000+
S
15
$500
$400
$300
$100
(1+0.1000)¹ (1+0.1000)² (1+0.1000)³ (1+0.1000)*
20
+
Cost of Capital (%)
$100
$300
$400
$675
(1+0.1000)¹ (1+0.1000) (1+0.1000)³ (1+0.1000)*
+
+
+
+
+
= $78.82
= $100.40
An NPV profile plots a project's NPV at various costs of capital, labeled "A" and "B" in the graph. A project's NPV profile is shown as follows. Identify
the range of costs (ranges labeled "A" and "B") of capital that a firm would use to accept and reject this project.
A-Z
NPV (Dollars)
400
dofice
300
200
A
100
B
-100
-200
0 2
4 6 8 10 12 14 16 18 20
COT OF CAPITAL (Percent)
A
WACC
IRR
The point at which the NPV profile intersects the horizontal axis represents the
Chapter 5 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 5 - (IRR) Check the IRRs for project F in Section 5-3.Ch. 5 - (IRR) What is the IRR of a project with the...Ch. 5 - (XIRR) What is the IRR of a project with the...Ch. 5 - Payback a. What is the payback period on each of...Ch. 5 - IRR Write down the equation defining a projects...Ch. 5 - Prob. 3PSCh. 5 - IRR rule You have the chance to participate in a...Ch. 5 - IRR rule Consider a project with the following...Ch. 5 - IRR rule Consider projects Alpha and Beta: The...Ch. 5 - Capital rationing Suppose you have the following...
Ch. 5 - Payback Consider the following projects: a. If the...Ch. 5 - Prob. 9PSCh. 5 - IRR Calculate the IRR (or IRRs) for the following...Ch. 5 - IRR rule Consider the following two mutually...Ch. 5 - IRR rule Mr. Cyrus Clops, the president of Giant...Ch. 5 - Prob. 13PSCh. 5 - Profitability index Look again at projects D and E...Ch. 5 - Prob. 15PSCh. 5 - Prob. 16PS
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