Problem 6-19 Capital Budgeting with InflationConsider the following cash flows on two mutually exclusive projects:YearProject A-$Project B-$054,00069,000134,00033,000229,00042,000324,00045,000The cash flows of Project A are expressed in real terms, whereas those of Project Bare expressed in nominal terms. The appropriate nominal discount rate is 10 percentand the inflation rate is 4 percent. Calculate the NPV for each project. (Do not roundintermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)Project AProject BWhich project should you choose?Project AProject B

ˇYearProject AProject B0-$54,000-$69,0001$34,000$33,0002$29,000$42,0003$24,000$45,000Nominal…

Answered: roblem 6-19 Capital Budgeting with…

roblem 6-19 Capital Budgeting with Inflation onsider the following cash flows on two mutually exclusive Year Project A Project B -$ -$ 0 54,000 69,000 34.000 33.000

Fundamentals of Financial Management (MindTap Course List)

15th Edition

ISBN:9781337395250

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter11: The Basics Of Capital Budgeting

Section: Chapter Questions

Problem 11P: CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE PROJECTS Project S costs 17,000, and its expected...

See similar textbooks

Related questions

Q: Suppose your firm has decided to use a divisional WACC approach to analyze projects. The firm…

A: WACC stands for Weighted Average Cost of Capital. It's a financial metric used to evaluate a…

Q: Which of the following relation regarding the boundary conditions is correct American call's…

A: American put option (the level at which early exercise becomes optimal) is lower than that of the…

Q: Consider an investor with risk aversion of A = 4. The investor owns a portfolio with expected return…

A: The investor's utility function is a mathematical representation of the investor's preferences…

Q: The following three mutually exclusive alternative proposals are being considered for flood proofing…

A: Equivalent Annual Cost (EAC) is the yearly cost of owning, operating, and maintaining an asset over…

Q: Month evious Month's Balance Finance Charge (in 5) (in 5) Purchases and Cash Advances Payments and…

A: Credit card are now popular now days and provide short term money to buy anything without paying…

Q: How much will $6,500 invested at the end of each year grow to in two years, assuming an interest…

A: In this question, we are required to determine the future value of $6,500 invested at the end of…

Q: A year ago, you bought a bond with a coupon rate of 5.4%, just after it paid its semiannual coupon.…

A: Price of bond is the present value of coupon payments plus present value of par value of the bond.

Q: Tecumseh Inc. is analyzing the possible merger with Devonshire Inc. Savings from the merger are…

A: The maximum cash price per share refers to the highest amount of cash that a company is willing to…

Q: 3. The proceeds of a 10,000-death benefit are left on deposit with an insurance company for seve…

A: Monthly payment of accumulated value is treated as an annuity payment for a fixed period.

Q: A stock has had the following year-end prices and dividends: Year Price Dividend $ 1 43.27 23456 2…

A: Returns refer to the income earned by the investor through an investment in a particular holding…

Q: Use the following to solve questions a. and b. and please buid an excel spreadsheet and please show…

A: Both choices result in the same monthly payment.The total cost over 5 years would be the same, as…

Q: Mary uses her credit card frequently. Which of the following is the best strategy to minimize the…

A: Credit cards are issued by banks for people holding accounts with the bank. A credit card allows the…

Q: Consider a project of the Cornell Haul Moving Company, the timing and size of the incremental…

A: Adjusted present value (APV):Adjusted Present Value (APV) is a financial evaluation method used to…

Q: Please show all steps in excel to solve this. Five years ago, Charles purchased a house for…

A: Detailed answer is given in the explanation.Explanation:Step 1: Monthly Payment for the Current…

Q: Johnny Cake Ltd. has 10 million shares of stock outstanding selling at $23 per share and an issue of…

A: The Weighted Average Cost of Capital (WACC) is a financial metric used to assess the cost of capital…

Q: Imagine the current discount rate is 3%. In 75 years, there is an equally likely chance that th…

A: Certainty equivalent is that discount rate that is most likely and would be certain to be achieved…

Q: Allain Dupre wants to set up a scholarship fund for his school. The annual scholarship payment is to…

A: Here the scholarship will be paid annually for perpetual period.Present value of the perpetual cash…

Q: A Company is considering a proposal of installing a drying equipment. The equipment would involve a…

A: The Payback Period tracks the duration for an investment to recover its initial cost, while the…

Q: A 25-year mortgage requires payments of $3,712.70 at the end of each three months 2% compounded…

Q: A stock currently pays a dividend of $2.50 for the year. Expected dividend growth is 15% for the…

A: $212.37Explanation:Calculate the dividends for the high growth period (first three years):Year 1…

Q: Phoebe realizes that she has charged too much on her credit card and has racked up $5,100 in debt.…

A: The present value monthly payments will be equal to the value of debt. We can use NPER function in…

Q: Which of the following statements is most correct? Group of answer choices Money market transactions…

A: The active areas of supply and demand where a wide range of financial assets are traded are known as…

Q: Refer to the following selected financial information from Hansen's, LLC. Comput the company's…

A: The debt-to-equity ratio is a financial measure that compares a company's total debt to its total…

Q: Cooperton Mining just announced it will cut its dividend from $3.88 to $2.68 per share and use the…

A: Common stock or shares of the company is the security that offers the ownership rights to the…

Q: outhern Power just paid an annual dividend of $7.7 per share. Because of increasing competition from…

A: Value of the stock can be determined by discounting the series of earnings or dividends with the…

Q: Solve for the stock price, P0, using the following information: D1: $3.31 D2: $3.94 D3: $4.76 D4:…

A: The objective of the question is to calculate the current stock price (P0) using the given dividends…

Q: What is the bond's current market price? Round your answer to the nearest cent. $

A: The bond price is equivalent to the sum of money required to purchase one. The amount that the bond…

Q: Bond J has a coupon rate of 3 percent. Bond K has a coupon rate of 9 percent. Both bonds have 18…

A: A bond is a fixed-income security that offers the investor a fixed set of coupon throughout the…

Q: You are looking to buy a car. You can afford $600 in monthly payments for five years. In addition to…

A: Car amount that can be afforded is equal to the present value of the monthly payments and the down…

Q: a. What is the firm's market value capital structure? (Enter your answers in whole dollars.) Market…

A: The market value of equity is the equivalent of a score that indicates a company's value on the…

Q: Econo-Cool air conditioners cost $340 to purchase, result in electricity bills of $190 per year, and…

A: Equivalent Annual Cost (EAC) is the annualized cost of an investment, considering all relevant…

Q: Cost of debt. Dunder-Mifflin, Inc. (DMI) is selling 600,000 coming year. The bond will pay a coupon…

A: Number of bonds600,000600,000600,000600,000Par value$100.00$100.00$100.00$100.00Coupon…

Q: Use the information given in Upper Midwest National Bank's balance sheet to answer the following…

A: A leverage ratio is a type of solvency ratio. It is calculated by dividing the total debt by the…

Q: Zozan Corp has just paid a dividend of $2 per share. The company's dividends are expected to grow at…

A: Curent stock price can be determined by discounting the expected dividend and the terminal value of…

Q: A financial intermediary's balance sheet is such that DA= 5, D₁ = 3. This FI has $300 million in…

A: Financial intermediaries (Fl) often use hedging techniques to manage their risks. One commonly used…

Q: If you own 12,000 shares of stock of Nike and it pays a dividend of $0.26 per share, then what is…

A: Dividend is the distribution of the income to the shareholders of the company.Number of shares =…

Q: At an output level of 18,000 units, you have calculated that the degree of operating leverage is…

A: Part 1: Answer:a. Fixed costs are $23,214.b. The operating cash flow will be $48,942.00 if output…

Q: Consider the following portfolio of assets: Loan Weight 1 0.30 2 0.70 Expected returni ம σ2 13% 11%…

A: Portfolio variance, determined by asset weights, individual asset volatilities, and correlations,…

Q: . A company seeks to maintain an internal growth rate of 13%, with a retention ratio (also called a…

A: The internal growth rate is the rate of growth in sales that does not require any external…

Q: An investment costs $1,025 and has a 20% probability of returning $524, a 20% probability of…

A: The risk level associated with a portfolio of the investment is known to be as value at risk of the…

Q: Julieta and Eric are purchasing a home. They wish to save money for 12 years and purchase a house…

A: When compounding investments, money grows over time by combining profits and earned interest. Unlike…

Q: Raph Inc. needs someone to supply it with 1,000,000 planks of wood per year to support its…

A: The lowest bid price is the selling price that will earn the lowest required rate of return after…

Q: On January 1, you win $51,750,000 in the state lottery. The $51,750,000 prize will be paid in equal…

A: Payment each year = P = $5,750,000Years = n = 9Interest rate = R = 5%/100 = 0.05 in decimalsTo find:…

Q: An all-equity firm is considering the projects shown below. The T-bill rate is 5 percent and the…

A: The risk-free rate is 5% and Market Risk Premium is 9%.

Q: The Swanson Corporation's common stock has a beta of 1.5. If the risk-free rate is 5.5 percent and…

A: Beta = b = 1.5Risk free Rate = rf = 5.5%Expected Market Return = rm = 13%

Q: a. What is the sensitivity of the project OCF to changes in the quantity supplied? (Do not round…

A: Net present value is computed by deducting the initial cost from the current value of cash flows. It…

Q: Lr 1+- r M = 12 1+ 12 12/ L the loan amount in dollars r the annual interest rate t=the number of…

A: Variables in the question:Cost of Jeep=$49530Down payment=5% of cost of JeepN=4 yearsRate=7.15%

Q: Consider the following information on Stocks I and II: State of Economy Probability of State of…

A: Standard deviation measures the dispersion relative to its mean, indicating volatility. Beta…

Q: first proje Capital TV ith a capital mprove $325,000 with the following expected annual decreases in…

A: IRR is the break even rate at which present value of cash flow is equal to initial investment and…

Q: Give the exaplanation of formula and concept.do not provide plagarised content otherwise i dislike…

A: A bond is a fixed-income security that provides the bondholder a defined periodic coupon payments…

Concept explainers

Cash budget

A cash budget is an estimate of an organization's cash flow for the future period. A cash budget forecasts future cash receipts and payments from various sources for a fiscal year. A cash budget can be created once a month or once a week to determine the organization's cash position and ensure its performance in relation to the budget. It aids in determining whether the company has enough cash and cash equivalents to meet its operational needs in the future. If cash receipts are insufficient to cover future expenses, an organization may plan to obtain funds from other sources. After estimating the sales, purchase, and capital expenditure budgets for the year, management develops a cash budget. These budgets are created to ensure that an organization's cash flow is managed. It is important to note that only cash transactions are recorded when actual cash enters and exits an organization.

Question

Problem 6-19 Capital Budgeting with Inflation
Consider the following cash flows on two mutually exclusive projects:
Year
Project A
-$
Project B
-$
0
54,000
69,000
1
34,000
33,000
2
29,000
42,000
3
24,000
45,000
The cash flows of Project A are expressed in real terms, whereas those of Project B
are expressed in nominal terms. The appropriate nominal discount rate is 10 percent
and the inflation rate is 4 percent. Calculate the NPV for each project. (Do not round
intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
Project A
Project B
Which project should you choose?
Project A
Project B

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1: Given information:

VIEW

Step 2: Calculation of NPV:

VIEW

Solution

VIEW

Step by step

Solved in 3 steps with 3 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE PROJECTS Project S costs 15,000, and its expected cash flows would be 4,500 per year for 5 years. Mutually exclusive Project L costs 37,500, and its expected cash flows would be 11,100 per year for 5 years. If both projects have a WACC of 14%, which project would you recommend? Explain.
CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE PROJECTS Project S costs 17,000, and its expected cash flows would be 5,000 per year for 5 years. Mutually exclusive Project L costs 30,000, and its expected cash flows would be 8,750 per year for 5 years. If both projects have a WACC of 12%, which project would you recommend? Explain.
Ch. 6. Capital Budgeting with Inflation. For questions 7 and 8 use the following information. Consider the following cash flows on two mutually exclusive projects: Year Project A Project B 0 -$60,000 -$75,000 1 $38,000 $40,000 2 $36,000 $42,000 3 $29,000 $46,000 The cash flows of Project A are expressed in real terms, whereas those of Project B are expressed in nominal terms. The appropriate nominal discount rate is 12 percent and the inflation rate is 3 percent. What is the NPV for Project B? Round to the nearest cent and format as "XX,XXX.XX"
TOPIC 6: CAPITAL BUDGETING TECHNIQUES ABC Manufacturing is considering two (2) mutually exclusive investments. The company wishes to use a CAPM-Type risk-adjusted discount rate (RADR) in its analysis. ABC's managers believe that the appropriate market rate of return is 10%, and they observe that the current risk-free rate of return is 5%. Cash flows associated with the two (2) projects are shown in the table below Project x $110,000 Project y $120,000 Year Net Cash Inflows (NCFt) 1 $40,000 $32,000 2 $40,000 $42,000 3 $40,000 $48,000 4 $40,000 $56,000 Answer the following questions: a. Use a risk-adjusted discount rate approach to calculate the net present value of each project, given that project X has a RADR factor (Risk Index) of 1.20 and project Y has an RADR factor (Risk Index) of 1.4. Please note that the RADR factors are similar to project betas. b. Discuss your findings in part a and recommend the preferred project.
Problem 7-19 Comparing Investment Criteria The treasurer of Tropical Fruits, Inc., has projected the cash flows of Projects A, B, and C as follows: Year Project A Project B Project C 0 −$ 195,000 −$ 325,000 −$ 195,000 1 145,000 238,000 155,000 2 145,000 238,000 125,000 Suppose the relevant discount rate is 12 percent per year. a. Compute the profitability index for each of the three projects. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) b. Compute the NPV for each of the three projects. a.Project A profitablity index Project B profitability index Project C profitability index b.Project A NPV Project B NPV Project C NPV
Year Project A Project B 0 –$ 51,000 –$ 66,000 1 31,000 30,000 2 26,000 39,000 3 21,000 42,000 The cash flows of Project A are expressed in real terms, whereas those of Project B are expressed in nominal terms. The appropriate nominal discount rate is 14 percent and the inflation rate is 5 percent. Calculate the NPV for each project. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Project A NPV: Project B NPV:
Ch. 6. Capital Budgeting with Inflation. For questions 7 and 8 use the following information. Consider the following cash flows on two mutually exclusive projects: Year Project A Project B 0 -$60,000 -$75,000 1 $38,000 $40,000 2 $36,000 $42,000 3 $29,000 $46,000 The cash flows of Project A are expressed in real terms, whereas those of Project B are expressed in nominal terms. The appropriate nominal discount rate is 12 percent and the inflation rate is 3 percent. What is the NPV for Project A?
PROBLEM 9-10 INDEPENDENT CASH FLOW AND CAPITAL BUDGETING UNDER UNCERTAINTIES Cable Corporation has determined the following discrete probability distributions for the net cash flow generated by a contemplated project. Period 1 Probability 0.10 0.25 0.30 0.25 0.10 Cash Flow 4,000 5,000 6,000 7,000 8,000 Period 2 Probability 0.10 0.25 0.30 0.25 0.10 Cash Flow 3,000 4,000 5,000 6,000 7,000 Period 3 Probability 0.10 0.25 0.30 0.25 0.10 Cash Flow 2,000 3,000 4,000 5,000 6,000 Rec 723 1. 2. 3. OBLE T i. i Required 1. Assume the probability distributions of cash flow for future periods are independent. Also assume that the after-tax, risk-free rate is 4 percent. If the project requires an initial outlay Rs. 10,000, determine the expected value of the net-present value. Determine the standard deviation about the expected value. 2. 3. What is the probability that the project will have a net present value of (a) greater than zero, (b) less than zero; (c) more than Rs. 4,000. Ans: (1) Rs. 3,948;…
Part 1 Please calculate the payback period, IRR, MIRR, NPV, and PI for the following two mutually exclusive projects. The required rate of return is 15% and the target payback is 4 years. Explain which project is preferable under each of the four capital budgeting methods mentioned above: Table 1 Cash flows for two mutually exclusive projects Year Investment A Investment B 0 -$5,000,000 -5,000,000 1 $1,500,000 $1,250,000 2 $1,500,000 $1,250,000 3 $1,500,000 $1,250,000 4 $1,500,000 $1,250,000 5 $1,500,000 $1,250,000 6 $1,500,000 $1,250,000 7 $2,000,000 $1,250,000 8 0 $1,600,000 Part 2 Please study the following capital budgeting project and then provide explanations for the questions outlined below: You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ), manufacturers of fine zithers. The market for zithers is growing quickly. The company bought some land three years ago…
Question 17 The net cash flows for two projects, A and B, are as follows: Year o 3 -220000 -5000 122000 130000 -60000 -10000 -120000 200000 1 2 A Given a discount rate of 4.5%: Blank 1: Calculate the net present value of project A. Blank 2: Estimate the IRR of project A. Write your answer as a percent %. If your answer has a decimal, round to 2 places. Blank # 1 Blank # 2
QUESTION 3 - Capital budgeting Technique You are considering two independent projects, Project A and Project B. The initial cash outlay associated with project A is RM50,000 and the initial cash outlay associated with project B is RM70,000. The required rate of return on both project is 12 percent. The expected annual free cash flows from each project are as follows Year Project A Project B 1 -RM50,000 -RM70,000 2 12,000 13,000 3 12,000 13,000 4 12,000 13,000 12,000 13,000 12,000 13,000 Calculate the NPV, PI, and IRR for each project and indicate if the project should be accepted.
Consider the following two mutually exclusive projects: year cash flow A cash flow B 0 -$10,110 -$10,110 1 5,373 4,443 2 3,373 3,543 3 4,473 5,343 What is the crossover rate for these two projects? 29 percent 48 percent 71 percent 75 percent 94 percent