investing in Long-Term Assets: Capital

in" rel="nofollow">investin" rel="nofollow">ing in" rel="nofollow">in Long-Term Assets: Capital Budgetin" rel="nofollow">ing 1 1-1 How are project classifications used in" rel="nofollow">in the capital budgetin" rel="nofollow">ing process? What are three potential flaws with the regular payback method? Does the discounted payback method correct all three flaws? Explain" rel="nofollow">in. 11-3 Why is the NPV, of a relatively long-term project (one for which a high percentage of its cash flows occurs in" rel="nofollow">in the distant future) more sensitive to changes in" rel="nofollow">in the WACC than that of a short-term project? What is a mutually exclusive project? How should managers rank mutually exclusive projects? 11-5 If two mutually exclusive projects were bein" rel="nofollow">ing compared, would a high cost of capital favor the longer-term or the shorter-term project? Why? If the cost of capital declin" rel="nofollow">ined, would that lead firms to in" rel="nofollow">invest more in" rel="nofollow">in longer-term projects or shorter-term projects? Would a declin" rel="nofollow">ine (or an in" rel="nofollow">increase) in" rel="nofollow">in the WACC cause changes in" rel="nofollow">in the IRR rankin" rel="nofollow">ing, of mutually exclusive projects? Explain" rel="nofollow">in. 11-6 Discuss the followin" rel="nofollow">ing statement If a firm has only in" rel="nofollow">independent projects, a constant WACC, and projects with normal cash flows, the NPV and IRR methods will always lead to identical capital budgetin" rel="nofollow">ing decisions. What does this imply about the choice between IRR and NPV? If each of the assumptions were changed (one by one), how would your answer change? 11-7 Why might it be rational for a small firm that does not have access to the capital markets to use the payback method rather than the NPV method? Project X is very risky and has an NPV of $3 million. Project Y is very safe and has an NPV of $2.5 million They are mutually exclusive, and project risk has been properly considered in" rel="nofollow">in the NPV analyses. Which project should be chosen? Explain" rel="nofollow">in. at rein" rel="nofollow">investment rate assumptions are built in" rel="nofollow">into the NPV, IRR, and MIRR methods? Give an explanation for your answer. 1 1-10 A firm has a $100 million capital budget. It is considerin" rel="nofollow">ing two projects, each costin" rel="nofollow">ing $100 million. Project A has an IRR of 20% and an NPV of $9 million; it will be termin" rel="nofollow">inated after 1 year at a profit of $20 million, resultin" rel="nofollow">ing in" rel="nofollow">in an immediate in" rel="nofollow">increase in" rel="nofollow">in EPS. Project B, which cannot be postponed, has an IRR of 30% and an NPV of $50 million. However, the firm's short-run EPS will be reduced if it accepts. Project B because no revenues will be generated for several years. Should the short-run effects on EPS in" rel="nofollow">influence the choice between the two projects? How might situations like this in" rel="nofollow">influence a firm's decision to use payback? NPV Project K costs $52,125, its expected cash in" rel="nofollow">inflows are $12,000 per year for 8 years, and its WACC is .12%. What is the project's NPV? IRR Refer to Problem 114. What is the project's IRR? MIRR Refer to Problem 114. What is the project's MIRR? Refer to Problem 114. What is the project's pa,yback? DISCOUNTED PAYBACK Refer to Problem 11-1. What is the project's discounted payback? NPV Your division is considerin" rel="nofollow">ing 'two projects with the folloWin" rel="nofollow">ing cash flows (in" rel="nofollow">in millions): 0 1 2 3 . What are .the projects' NPVs assumin" rel="nofollow">ing the WACC is 5%? 10%? 15%? b. What are the projects' IRRs at each of these VVACCs? If the WACC. was 5% and A and B were, mutually exclusive, which project would you choose? What if the. WACC was 10%? 15%? (Hin" rel="nofollow">int The crossover rate is 7.81%) $17