Question
In: Finance
What is the appropriate decision rule for a firm considering undertaking a capital project? Give a...
What is the appropriate decision rule for a firm considering undertaking a capital project? Give a real life example.
Solutions
Expert Solution
The appropriate decision rule is to calculate NPV using discount
rate as WACC at target debt equity ratio. The NPV which is present
value of all future cash flowws minus the initila invetsment should
be greater than 0. Only then can it increase the value of the firm.
IF NPV<0 it will eat away the value of the firm.
NPV = 
Cash flows/(!+WACC)t - Initial Investment
A plabe is to be chosen by an airlines company which has a life of
10 years, will cost $132 million and will produce net cash flows of
$24 million per year. Shao plans to serve the route for only 10
years. Inflation in operating costs, airplane costs, and fares is
expected to be zero, and the company's cost of capital is 8%.
| Plan B | A | B | C | D | E | F | G | H | I | J | K | |
| 1 | Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 |
| 2 | Initial Investment | -132 | ||||||||||
| 3 | Nt cash flows | 24 | 24 | 24 | 24 | 24 | 24 | 24 | 24 | 24 | 24 | |
| 4 | Cost of Capital | 8% | ||||||||||
| NPV | 29.04 | NPV(A4,B3:K3) | ||||||||||
Since NPV is positive and it adds value to the firm the Plane
should be bought.
Best of Luck. God Bless
jeff jeffy answered 2 years agoRelated Solutions
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A firm evaluates all of its projects by applying the NPV
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Year
Cash Flow
0
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28,600
1
12,600
2
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3
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1. A firm evaluates all of its projects by applying the NPV decision rule. A project...
1.
A firm evaluates all of its projects by applying the NPV
decision rule. A project under consideration has the following cash
flows:
Year
Cash Flow
0
$
-34,000
1
15,000
2
17,000
3
13,000
If the NPV = $1.27, should the firm accept this project?
A) Yes
B) No
2.
If the NPV of the above project is as stated above, how much
value does it add to the firm, compared to investing in an
Opportunity Cost Investment project?...
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A firm evaluates all of its projects by applying the NPV
decision rule. A project under consideration has the following cash
flows:
Year
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0
$
-27,700
1
11,700
2
14,700
3
10,700
What is the NPV for the project if the required return is 12
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your answer to 2 decimal places, e.g., 32.16.)
At a required return of 12 percent, should the firm accept this
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Yes...
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flows: Year Cash Flows 0 -3477 1 1468 2 2290 3 1948 What is the NPV
for the project if the required return is 11 percent? (Negative
amount should be indicated by a minus sign. Do not round
intermediate calculations and round your final answer to 2 decimal
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27,300
1
11,300
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14,300
3
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your answer to 2 decimal places, e.g., 32.16.)
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A firm evaluates all of its projects by applying the NPV decision rule. A project under...
A firm evaluates all of its projects by applying the NPV
decision rule. A project under consideration has the following cash
flows:
Year
Cash Flow
0
–$
34,000
1
15,000
2
17,000
3
13,000
What is the NPV of the project if the required return is 11
percent? (Do not round intermediate calculations and round
your answer to 2 decimal places, e.g., 32.16.)
At a required return of 11 percent, should the firm accept this
project?
Yes
No
What is...
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