Financial Management: Theory & Practice
16th Edition
ISBN: 9781337909730
Author: Brigham
Publisher: Cengage
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Chapter 10, Problem 23SP
Start with the partial model in the file Ch10 P23 Build a Model.xlsx on the textbook’s Web site. Gardial Fisheries is considering two mutually exclusive investments. The projects’ expected net cash flows are as follows:
- a. If each project’s cost of capital is 12%, which project should be selected? If the cost of capital is 18%, what project is the proper choice?
- b. Construct
NPV profiles for Projects A and B. - c. What is each project’s
IRR ? - d. What is the crossover rate, and what is its significance?
- e. What is each project’s MIRR at a cost of capital of 12%? At r = 18%? (Hint: Consider Period 7 as the end of Project B’s life.)
- f. What is the regular payback period for these two projects?
- g. At a cost of capital of 12%, what is the discounted payback period for these two projects?
- h. What is the profitability index for each project if the cost of capital is 12%?
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a. Calculate the projects’ NPVs, IRRs, MIRRs, regular paybacks, and discounted paybacks.b. If the two projects are independent, which project(s) should be chosen?c. If the two projects are mutually exclusive and the WACC is 10%, which project(s)should be chosen?d. Plot NPV profiles for the two projects. Identify the projects’ IRRs on the graph.e. If the WACC was 5%, would this change your recommendation if the projects weremutually exclusive? If the WACC was 15%, would this change your recommendation?Explain your answers.f. The crossover rate is 13.5252%. Explain what this rate is and how it affects the choicebetween mutually exclusive projects.g. Is it possible for conflicts to exist between the NPV and the IRR when independentprojects are being evaluated? Explain your answer.h. Now look at the regular and discounted paybacks. Which project looks better whenjudged by the paybacks?i. If the payback was the only method a firm used to accept or reject projects, what paybackshould it…
A. Calculate the profitability index for project X.
B. Calculate the profitability for project Y
C. Using the NPV method combined with the PI aporoach, which project would you select? Use a discount rate of 13 percent
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
0.18
B
- 73
30
30
30
30
0.18
Assume that projects A and B are mutually exclusive. The correct investment decision and the best rationale for that decision is to
A. invest in project B, since NPV, > NPV,
A
B. invest in project A, since NPV, > 0.
OC. invest in project A, since NPV, IRR,
A'
Chapter 10 Solutions
Financial Management: Theory & Practice
Ch. 10 - Define each of the following terms:
Capital...Ch. 10 - What types of projects require the least detailed...Ch. 10 - Explain why the NPV of a relatively long-term...Ch. 10 - When two mutually exclusive projects are being...Ch. 10 - Suppose a firm is considering two mutually...Ch. 10 - A project has an initial cost of 40,000, expected...Ch. 10 - Refer to Problem 10-1. What is the project’s IRR?
Ch. 10 - Refer to Problem 10-1. What is the projects MIRR?Ch. 10 - Prob. 4PCh. 10 - Prob. 5P
Ch. 10 - Prob. 6PCh. 10 - Your division is considering two investment...Ch. 10 - Edelman Engineering is considering including two...Ch. 10 - Davis Industries must choose between a gas-powered...Ch. 10 - Project S has a cost of 10,000 and is expected to...Ch. 10 - Your company is considering two mutually exclusive...Ch. 10 - Prob. 12PCh. 10 - Cummings Products is considering two mutually...Ch. 10 - Prob. 14PCh. 10 - Prob. 15PCh. 10 - Shao Airlines is considering the purchase of two...Ch. 10 - The Perez Company has the opportunity to invest in...Ch. 10 - Filkins Fabric Company is considering the...Ch. 10 - Prob. 19PCh. 10 - The Aubey Coffee Company is evaluating the...Ch. 10 - Your division is considering two investment...Ch. 10 - Prob. 22PCh. 10 - Start with the partial model in the file Ch10 P23...Ch. 10 - What is capital budgeting?Ch. 10 - Prob. 2MCCh. 10 - c. (1) Define the term net present value (NPV)....Ch. 10 - Prob. 4MCCh. 10 - Draw NPV profiles for Franchises L and S. At what...Ch. 10 - What is the underlying cause of ranking conflicts...Ch. 10 - Define the term modified IRR (MIRR). Find the...Ch. 10 - What does the profitability index (PI) measure?...Ch. 10 - (1) What is the payback period? Find the paybacks...Ch. 10 - Prob. 10MCCh. 10 - In an unrelated analysis, you have the opportunity...Ch. 10 - You are also considering another project that has...
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