Reference no: EM131346176
Capital rationing: IRR and NPV approaches Valley Corporation is attempting to select the best of a group of independent projects competing for the firm’s fixed capital budget of $4.5 million. The firm recognizes that any unused portion of this budget will earn less than its 15% cost of capital, thereby resulting in a present value of inflows that is less than the initial investment. The firm has summarized, in the following table, the key data to be used in selecting the best group of projects.
LG 4
LG 6
LG 6
Project Initial investment IRR
Present value of
inflows at 15%
A 2$5,000,000 17% $5,400,000
B 2800,000 18 1,100,000
C 22,000,000 19 2,300,000
D 21,500,000 16 1,600,000
E 2800,000 22 900,000
F 22,500,000 23 3,000,000
G 21,200,000 20 1,300,000
a. Use the internal rate of return (IRR) approach to select the best group of projects.
b. Use the net present value (NPV) approach to select the best group of projects.
c. Compare, contrast, and discuss your findings in parts a and b.
d. Which projects should the firm implement? Why?
Two companies are looking at the same project
: Now, suppose that two companies are looking at the same project. Company "A" has a beta of 1.5 and a cost of capital of 25%. Company "B" has a beta of 0.8 and a cost of capital of 15%. When evaluated at a rate of 15%, the project shows an NPV of +$5 ..
|
Give the clients understanding of the boca market
: Imagine that you are a real estate agent in Florida and you are working with a retired couple from out of state. The couple is considering purchasing a retirement home in Boca Raton. Identify what might be considered to be the three most significant ..
|
What is the firm horizon or continuing value
: Hart Enterprises recently paid a dividend of $1.25. It expects to have nonconstant growth of 20% for 2 years followed by a constant rate of 5% thereafter. The firm's rate of return is 10%. How far away is the horizon date? What is the firm's horizon ..
|
Building belongs in structural classification
: What would be the total fire insurance premium for Best Seconds if their $837,500 building belongs in structural classification D? The contents are worth $421,300 and they received an area rating of 2. Alana wishes to obtain auto insurance. She wants..
|
Capital rationing-net present value-internal rate of return
: Capital rationing: IRR and NPV approaches Valley Corporation is attempting to select the best of a group of independent projects competing for the firm’s fixed capital budget of $4.5 million. Use the internal rate of return (IRR) approach to select t..
|
Creating capital expenditure funding proposal
: Ted Jones, the Surgery Unit Director, is about to choose his strategy for creating a capital expenditure funding proposal for the coming year. Ted's unit needs more room. The Surgery Unit is running at over 90% capacity. What should Ted decide to ask..
|
Why is it higher than the yield of the discount bond
: Blue and Gold Corp. issues two bonds with 30-year maturities. Both bonds are callable at $1,050. The first bond is issued at a deep discount with a coupon rate of 4% and a price of $580 to yield 7.56%. The second bond is issued at par value with a co..
|
Transactions outside the operating budget
: Metropolis Health System (MHS) has received a wellness grant from the charitable arm of an area electronics company. The grant will run for 24 months, beginning at the first of the next fiscal year. Two therapists and two registered nurses will each ..
|
What is the after-tax rate of return-equipment investment
: Jaguar Oil Corp. owns a piece of petroleum drilling equipment that costs $100,000, utilizes MACRS depreciation, and has a combined 40% tax rate. Jaguar will lease the equipment to others and each year will receive $30,000 in rent. At the end of 5 yea..
|