Question
In: Finance
If a company applies its cost of capital to all projects, it runs the risk of...
If a company applies its cost of capital to all projects, it runs the risk of accepting some negative-NPV projects that are _____ the company’s existing projects.
a. riskier than
b. of lower risk
c. of the same risk
d. of shorter life than
e. of longer life than
Solutions
jeff jeffy answered 2 years agoRelated Solutions
How do you calculate risk and cost in capital projects?
How do you calculate risk and cost in capital projects?
When evaluating the progress of capital projects, managers should investigate both cost over runs and cost...
When evaluating the progress of capital projects, managers
should investigate both cost over runs and cost under runs. Why is
it important that both are investigated?
Consolidated Inc. uses a weighted average cost of capital of 12% to evaluate average-risk projects and...
Consolidated Inc. uses a weighted average cost of capital of 12%
to evaluate average-risk projects and adds/subtracts two percentage
points to evaluate projects of greater/lesser risk. Currently, two
mutually exclusive projects are under consideration. Both have a
cost of $200,000 and last four years. Project A, which is riskier
than average, will produce annual after-tax cash flows of $71,000.
Project B, which has less-than-average risk, will produce after-tax
cash flows of $146,000 in Years 3 and 4 only. What should...
1.1 A company with a cost of capital of 20% has identified projects with the following...
1.1 A company with a cost of capital of 20% has
identified projects with the following cash flows:
Year
Project C
Project D
0
-N$100 000
-N$30 000
1
40 000
10 000
2
45 000
15 000
3
50 000
20 000
4
55 000
25 000
Required 1:
a. Calculate the payback period of each project.
b. Calculate the NPV and IRR of each project.
c. Which project would you accept on basis of NPV? On basis of...
1.1 A company with a cost of capital of 20% has identified projects with the following...
1.1 A company with a cost of capital of 20% has
identified projects with the following cash flows:
Year
Project C
Project D
0
-N$100 000
-N$30 000
1
40 000
10 000
2
45 000
15 000
3
50 000
20 000
4
55 000
25 000
Required 1:
A. Calculate the NPV and IRR of each project.
A firm estimates that its average-risk projects have a WACC of 10%, its below-average risk projects...
A firm estimates that its average-risk projects have a WACC of
10%, its below-average risk projects have a WACC of 9%, and its
above-average risk projects have a WACC of 12%. Which of the
following projects (A, B, and C) should the company accept?
A:Project B is of below-average risk and has a return of
9.5%.
B:Project C is of above-average risk and has a return of
11.5%.
C:Project A is of average risk and has a return of 9%....
A firm is considering the following projects. Its opportunity cost of capital is 12%. Project 0...
A firm is considering the following projects. Its opportunity
cost of capital is 12%.
Project 0 1 2 3 4
A -8,500 +1,875 +1,875 +4,750 0
B -4,500 0 +4,500 +3,750 +4,750
C -8,500 +1,875 +1,875 +4,750 +8,500
1) What is the payback period on each project?
2) What is the discounted payback period on each project?
In capital budgeting: a. If a firm accepts projects without regard for risk, then the...
In capital budgeting:
a.
If a firm accepts projects without regard for risk, then the
company can change its overall risk profile firm as perceived by
investors.
b.
Projects are thought to be incremental to the normal business
of the firm.
c.
All of the above.
d.
Risk is important and should be included in the analysis but
often isn’t.
Your division is considering two projects. Its WACC is 10% (weighted average cost of capital, that...
Your division is considering two projects. Its WACC is 10%
(weighted average cost of capital, that represent a firm’s cost of
capital in which each category of capital is proportionately
weighted), the projects’ after-tax cash flows (in millions of
dollars) would be as follows:
Project A
0 = - $30
1 = - $ 5
2 = $ 10
3 = $ 15
4 = 20
Project B
0 = - $ 30
1 = $ 20
2 = $10...
Valvano Publishing Company is trying to calculate its cost of capital for use in a capital...
Valvano Publishing Company is trying to calculate its cost of
capital for use in a capital budgeting decision. Mr. Washburn, the
vice-president of finance, has given you the following information
and asked you to compute the weighted average cost of capital. The
company currently has outstanding a bond with an 9.2 percent coupon
rate and a convertible bond with a 6.2 percent rate. The firm has
been informed by its investment dealer, Dean, Smith, and Company,
that bonds of equal...
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