Essentials of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
9th Edition
ISBN: 9781259277214
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Chapter 8, Problem 14QP
LO4 LO6 14. Problems with Profitability Index. The Matterhorn Corporation is trying to choose between the following two mutually exclusive design projects:
| Year | Cash Flow’ (I) | Cash Flow’ (II) |
| 0 | –$78,000 | –$28,800 |
| 1 | 28,300 | 9,600 |
| 2 | 34,800 | 17,400 |
| 3 | 43,700 | 15,600 |
a. If the required return is 11 percent and the company applies the profitability index decision rule, which project should the firm accept?
b. If the company applies the
c. Explain why your answers in parts (a) and (b) are different.
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The Weiland Computer Corporation is trying to choose between the following mutually exclusive design projects, P1 and P2:Year 0123 Cash flows (P1) -$53,000 27,000 27,000 27,000 Cash flow (P2) -$16,000 9,100 9,100 9,100a. If the discount rate is 10 percent and the company applies the profitability index (PI) decision rule, which project should the firm accept?b. If the firm applies the Net Present Value (NPV) decision rule, which project should it take?c. Are your answers in (a) and (b) different? Explain why?
The Weiland Computer Corporation is trying to choose between the following mutually
exclusive design projects, P1 and P2:
Year
1
3
Cash flows (P1)
-$53,000
27,000
27,000
27,000
Cash flows (P2)
-$16,000
9,100
9,100
9,100
a. If the discount rate is 10 percent and the firm applies the Net Present Value (NPV) decision
rule, which project should the firm accept?
b. If the firm applies the profitability index (PI) decision rule, which project should it take?
5). The HC Corporation is trying to choose between the following two mutually exclusive design projects:
Year
Cash Flow I (in dollars)
Cash Flow II (in dollars)
0
-64, 000
-18,000
1
31, 000
9,700
2
31, 000
9,700
3
31, 000
9,700
a). If the required return is 10%, and the company applies the profitability index decision rule, which project should the firm accept? Why?
b). If the company applies the NPV decision rule, which project should it take? Why?
c). Explain why your answers in (a) and (b) are different.
Chapter 8 Solutions
Essentials of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 8.1 - Prob. 8.1ACQCh. 8.1 - Prob. 8.1BCQCh. 8.2 - Prob. 8.2ACQCh. 8.2 - Prob. 8.2BCQCh. 8.3 - Prob. 8.3ACQCh. 8.3 - What are the weaknesses of the AAR rule?Ch. 8.4 - Prob. 8.4ACQCh. 8.4 - Prob. 8.4BCQCh. 8.5 - What does the profitability index measure?Ch. 8.5 - Prob. 8.5BCQ
Ch. 8.6 - Prob. 8.6ACQCh. 8.6 - If NPV is conceptually the best tool for capital...Ch. 8 - Prob. 8.1CCh. 8 - Prob. 8.2CCh. 8 - Prob. 8.3CCh. 8 - Prob. 8.4CCh. 8 - Prob. 1CTCRCh. 8 - Prob. 2CTCRCh. 8 - Prob. 3CTCRCh. 8 - Prob. 4CTCRCh. 8 - Net Present Value. Concerning NPV: a.Describe how...Ch. 8 - LO3 8.6.Internal Rate of Return. Concerning IRR:...Ch. 8 - Prob. 7CTCRCh. 8 - Prob. 8CTCRCh. 8 - Prob. 9CTCRCh. 8 - Prob. 10CTCRCh. 8 - Prob. 11CTCRCh. 8 - Prob. 12CTCRCh. 8 - Internal Rate of Return. In a previous chapter, we...Ch. 8 - Net Present Value. It is sometimes stated that the...Ch. 8 - Prob. 15CTCRCh. 8 - LO1 l.Calculating Payback. What is the payback...Ch. 8 - Calculating Payback. An investment project...Ch. 8 - Prob. 3QPCh. 8 - Calculating AAR. Youre trying to determine whether...Ch. 8 - Calculating IRR. A firm evaluates all of its...Ch. 8 - LO4 6. Calculating NPV. For the cash flows in the...Ch. 8 - Calculating NPV and IRR. A project that LO3, LO4...Ch. 8 - Prob. 8QPCh. 8 - Prob. 9QPCh. 8 - LO3 LO4 10.NPV versus IRR. Zayas, LLC, has...Ch. 8 - Prob. 11QPCh. 8 - Prob. 12QPCh. 8 - Prob. 13QPCh. 8 - LO4 LO6 14.Problems with Profitability Index. The...Ch. 8 - LO1, LO3, LO4, LO6 15.Comparing Investment...Ch. 8 - LO3 LO4 16.NPV and IRR. Reece Company is presented...Ch. 8 - LO4 LO6 17.NPV and Profitability Index. Robben...Ch. 8 - Crossover Point. Hodgkiss Enterprises has gathered...Ch. 8 - Payback Period and IRR. Suppose you have a project...Ch. 8 - NPV and Discount Rates. An investment has an...Ch. 8 - NPV and Payback Period. Kaleb Konstruction, Inc.,...Ch. 8 - Prob. 22QPCh. 8 - MIRR. Suppose the company in the previous problem...Ch. 8 - Crossover and NPV. Seether, Inc., has the...Ch. 8 - LO3 LO4 25.Calculating IRR. A project has the...Ch. 8 - Prob. 26QPCh. 8 - LO1, LO4, LO6 27.Cash Flow Intuition. A project...Ch. 8 - Prob. 28QPCh. 8 - Prob. 29QPCh. 8 - LO3 LO4 30.NPV and IRR. Anderson International...Ch. 8 - Bullock Gold Mining Seth Bullock, the owner of...Ch. 8 - Bullock Gold Mining Seth Bullock, the owner of...Ch. 8 - Prob. 3CC
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