Fin Chapter 11 Homework Essay Example
Chapter 10
1. D -The net present value method (NPV) is generally regarded by academics as being the best single method for evaluating capital budgeting projects
2. A -More of Project A’s cash flows occur in the later years.
3. E - If the 4-year payback results in accepting just the right set of projects under average economic conditions, then this payback will result in too few long-term projects when the economy is weak
4. C - You should recommend that the project be accepted because (1) its NPV is positive and (2) although it has two IRRs, in this case it would be better to focus on the MIRR, which exceeds the WACC. You should explain this to the president and tell him that the firm’s value will increase if the project is accepted.
5. C - $209.0
Chapter 11
1. B - An example of an externality is a situation where a bank opens a new office, and that new office causes deposits in the bank’s other offices to decline.?
2. C - Project X has more market risk than Project Y.
3. D - If equipment is expected to be sold for more than its book value at the end of a project’s life, this will result in a profit. In this case, despite taxes on the profit, the end-of-project cash flow will be greater than if the asset had been sold at book value, other things held constant.
4. E - $19,325
WACC 10.0% Years 0 1 2 3
Investment cost -$65,000
Sales revenues $65,500 $65,500 $65,500
Operating costs 25,000 25,000 25,000
Depreciation rate = 33.333% 21,667 21,667 21,667
Operating income $18,833 $18,833 $18,833
Taxes Rate = 35% 6,592 6,592 6,592
After-tax EBIT $12,242 $12,242 $12,242
Depreciation 21,667 21,667 21,667
Cash flow -$65,000 $33,908 $33,908 $33,908
NPV $19,325
5. E - $35,530
|Current NPV
1. D -The net present value method (NPV) is generally regarded by academics as being the best single method for evaluating capital budgeting projects
2. A -More of Project A’s cash flows occur in the later years.
3. E - If the 4-year payback results in accepting just the right set of projects under average economic conditions, then this payback will result in too few long-term projects when the economy is weak
4. C - You should recommend that the project be accepted because (1) its NPV is positive and (2) although it has two IRRs, in this case it would be better to focus on the MIRR, which exceeds the WACC. You should explain this to the president and tell him that the firm’s value will increase if the project is accepted.
5. C - $209.0
Chapter 11
1. B - An example of an externality is a situation where a bank opens a new office, and that new office causes deposits in the bank’s other offices to decline.?
2. C - Project X has more market risk than Project Y.
3. D - If equipment is expected to be sold for more than its book value at the end of a project’s life, this will result in a profit. In this case, despite taxes on the profit, the end-of-project cash flow will be greater than if the asset had been sold at book value, other things held constant.
4. E - $19,325
WACC 10.0% Years 0 1 2 3
Investment cost -$65,000
Sales revenues $65,500 $65,500 $65,500
Operating costs 25,000 25,000 25,000
Depreciation rate = 33.333% 21,667 21,667 21,667
Operating income $18,833 $18,833 $18,833
Taxes Rate = 35% 6,592 6,592 6,592
After-tax EBIT $12,242 $12,242 $12,242
Depreciation 21,667 21,667 21,667
Cash flow -$65,000 $33,908 $33,908 $33,908
NPV $19,325
5. E - $35,530
|Current NPV