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NPV versus IRR Consider the following cash flows on two mutually exclusive projects for the Bahamas Recreation Corporation (BRC). Both projects require an annual return of 14 percent. Year Deepwater Fishing New Submarine Ride 0 −$850,000 −$1,650,000 1 320,000 810,000 2 470,000 750,000 3 410,000 690,000 As a financial analyst for BRC, you are asked the following questions: If your decision rule is to accept the project with the greater IRR, which project should you choose? Because you are fully aware of the IRR rule’s scale problem, you calculate the incremental IRR for the cash flows. Based on your computation, which project should you choose? To be prudent, you compute the NPV for both projects. Which project should you choose? Is it consistent with the incremental IRR rule?
Year-to-date, Oracle had earned a −1.34 percent return. During the same time period, Valero Energy earned 7.96 percent and McDonald's earned 0.88 percent. If you have a portfolio made up of 30 percent Oracle, 25 percent Valero Energy, and 45 percent ..
You are prepared to make monthly payments of $ 290, beginning at the end of this month, into an account that pays 7 percent interest compounded monthly. How many payments will you have made when your account balance reaches $20,000?
You are trying to pick the least-expensive car for your new delivery service. You have two choices: the Scion xA, which will cost $23,500 to purchase and which will have OCF of –$3,100 annually throughout the vehicle’s expected life of three years as..
Suppose the short rate today is r1 = 6 percent while the expected short rate next year is E(r2) = 7 percent. Suppose Ann is a short-term investor whose goal is to have $2,000 next year. Find the risk premium Ann is demanding from the 2-year zero. Fin..
Brickhouse is expected to pay annual dividends of $1.90 and $2.10 over the next two years, respectively. After that, the company expects to pay a constant dividend of $2.30 a share. What is the value of this stock at a required return of 16 percent?
In past few years, a number of high-profile retail businesses (e.g., Target, Home Depot) have been subject to personal information hacking. Explain the application of e-commerce risk on these companies and how they can manage the risk. What level of ..
Lexington Brand has sales of 318,400, costs of 199,400, depreciation expense of 20,600, interest expense of 1,100, and a tax rate of 34 percent. The firm paid out 16,500 in dividends. What is the addition to retained earnings?
Which of the following is not a direct cost of bankruptcy?
After tax salvage value Kennedy Air Services is now in the final year of a project. The equipment originally cost $33 million, of which 75% has been depreciated. Kennedy can sell the used equipment today for $8.25 million, and its tax rate is 35%. Wh..
What is the duration of a zero coupon bond? What is the relationship between (a): duration and maturity? (b): between duration and yield? (c): between duration and coupon interest? What is the economic meaning of duration? How is duration related to ..
Imagine a close friend asks you if they should attempt to manage their own portfolio or hire someone to help them. Share the pros and cons of both as well as at least one resource (book, article, video, etc.) that can help them decide.
A $20 Million 8-year bond pays 6.25% coupon with a 6% yield. Use the model to construct a 70% synthetic floater and 30% inverse-floater. The required synthetic has a 4% basis + 2% spread. Summarize your results including prices, price durations and c..
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