Project B 0 -100 -10000 C. If a project has normal cash flows and its IRR exceeds its WACC, then theproject's NPV must be positive. 2 Heavenly Cookie Company reports the following annual Investment $615,000 Year Cash flow Which of the following statements is CORRECT? since UFCF represents cash available to all providers of capital. e. What is the crossover rate, and what is its significance? Initial cost $750,000 $650,000 The solution shows all the calculations together with explanations to arrive at the correct answers. d. Which of the following statements is CORRECT? If a project's IRR is equal to its cost of capital, then under all reasonable conditions, the project's IRR must be negative.b. Definition Definition Transfer of funds into a company by any third party, which may happen due to any operational, investing, and financing activities. To answer this question, Blue Hamsters CFO has asked that you compute the projects payback period using the following expected net cash flows and assuming that the cash flows are received evenly throughout each year. A - A projects's regular IRR is found by discounting the cash inflows at the WACC B - To find a project's IRR, we must solve for the discount rate that causes the PV of the future cash flows to equal the project's investment cost C - to find a project's IRR, we must find a discount rate that is equal to the Image Courtesy: thedocstoc.com, Your email address will not be published. If a project's IRR is equal to its WACC, then under all reasonable conditions the project's NPV must be zero. Year 7 140,000 To (c) IRR is 9%. McqMate.com is an educational platform, Which is developed BY STUDENTS, FOR STUDENTS, The main The cost of equity may also be calculated incorrectly if the estimated market risk premium is too high or low. How would you respond toyour CFO if she instructed you to use the IRR technique to make capital budgeting decisions onprojects with cash flow streams that alternate between inflows and outflows? 64,000 76,500 Using the accrual method, what's the unearned revenue as of December 31. On the other hand, if the cost of equity is lower than the cost of debt, the company may choose to raise capital through equity. It is a capital budgeting techniquewhich helps in decision, A: The expected return refers to the weighted return of the component securities to provide the desired, A: When the borrower borrows a loan from the lender, he has to pay a rate of interest on the borrowed, A: Profitability index refers to the method of capital budgeting used for measuring the attractiveness, A: Amortization refers to the gradual reduction of a debt or loan through regular payments over a, A: The given details relating to a put option for a non-dividend paying stock are:Type of, A: 1. $4,570,000 Equivalent, A: Time = nper = 3 yearsPresent Value = pv = $8000Future Value = fv = $30,000Annual Payment = pmt =, A: Future value is the value of the future cash flows being compounded at a predefined rate of interest, A: Coefficient of variation shows how much is risk involved and lower coefficient indicates lower risk, A: Hedging is a financial strategy used to reduce or mitigate the risk of adverse price movements in an, Net present value is the most important concept of finance. What does this imply about the choice between IRR and NPV? Before the project is carried out, PT XYZ needs to calculate coil warehouse rental rates and investment feasibility analysis. D. Both projects have a positive net present value. $2,000,000 It is charge on, A: Variables in the question:Required sales=$1,531,678Contribution margin=43%Fixed, A: A sinking fund is a financial account or reserve that a business or institution creates with the, A: First, we need to determine the annual equivalent rate, as the payments are monthly while interest, A: Yvan, a 64-year-old retiree, has a stable monthly income from a non-indexed life annuity of $2,000., A: Variable costs are costs which changes along with change in activity level. The primary difference between WACC and IRR is that where WACC is the expected average future costs of funds (from both debt and equity sources), IRR is an investment analysis technique used by companies to decide if a project should be undertaken. Post any question and get expert help quickly. Calculate the expected cost in the final year if the inflation rate is 3% for the next 3 years and 5% for the last one. A: Portfolio expected return and beta are calculated as shown below. Imagineering, Inc., is considering an investment in CAD-CAM compatible design software with the cash flow profile shown in the table below. (Hint: Consider Period 7 as the end of Project Bs life.) e. CFs c. The popularity of IRR may be attributable to the fact that it is a rate of return, a concept that is comfortably used by managers. 10,800 If a project's NPV is greater than zero, then its IRR must be less than the WACC. Discuss the following statement: If a firm has only independent projects, a constant WACC,and projects with normal cash flows, the NPV and IRR methods will always lead to identicalcapital budgeting decisions. 16.47% C-If a project's IRR is equal to its WACC, then under all reasonable conditions the project's NPV must be zero. Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. Assume that the project being considered has normal cash flows (n one outflow followed by a series of inflows. Understanding this information will provide fundamental knowledge related to marketing research. T3 Which of the following statements is CORRECT? If a project's IRR is positive, then its NPV must also be positive.e. 39.58% IRR is mostly used in capital budgeting, and it makes up the Net Present Value (NPV) using all the cash flows from a particular project and making them zero. The higher the WACC used to calculate the NPV, the lower the calculated NPV will be. 2. Accept profitable, low risk projects and reject unprofitable, high risk projects A. A: Internal rate of return is return at which net present value is zero. Solved 1. Which of the following statements is CORRECT? - Chegg Learn how to effectively improve your debt-to-equity ratio using PowerPoint presentations. Out-of-the-box tools for meaningful, actionable, and user-friendly reports, dashboards & presentations. 1 On the other hand, WACC is the expected future cost of a fund. Additionally, the growing emphasis on sustainable finance and environmental, social, and governance (ESG) factors will likely influence the calculation of WACC in the future. A project's IRR is the discount rate that causes the PV of e. The IRR is the most reliable of the capital budgeting methods. Calculate the payback period for Project A and Project B. maximum adjusted WACC for accepting the project. The budge. If the cost of capital is 9%, Project B's NPV will be higher than Project A's.e. Provide an example of the text message you would send to the member. The NPVs of relatively risky projects should be found using relatively low WACCs. 32.18% 2003-2023 Chegg Inc. All rights reserved. 10.5% (Round to two decimal places.) Which of the following statements is CORRECT? Capital rationing method c. Net present value method d. Average rate of return method, When using the NPV method for a particular investment decision, if the present value of all cash Inflows Is greater than the present value of all cash outflows, then _______ . It plays an important role in financial decision-making as it impacts the profitab. Salvage Compute the internal rate of return for each of the projects using Excel functions. If a project's NPV is less than zero, then its IRR must be less than the WACC. If Project A has a higher IRR than Project B, then Project A must have the lower NPV. of. Provide explanation for choice, Managerial Accounting: The Cornerstone of Business Decision-Making. If the Discounted Rate of return is Zero what is the value of IRR? FIN 305 --> Cumulative Final Flashcards | Quizlet 21,600 e. 5 (Ch. Question: Which of the following statements is CORRECT?Answer a.If a project is independent, then it cannot have multiple IRRs.b.Multiple IRRs can only occur if the signs of the cash flows Which of the following statements is CORRECT? A: a) The development of new technologies and software solutions will make it easier to calculate WACC accurately and quickly. A-If a project's IRR is equal to its WACC, then, under all reasonable conditions, the project's NPV must be negative. Conversely, if the IRR is lower than the WACC, the project may not be financially viable, and alternative financing options or project modifications should be considered. C. There is no necessary relationship between a projects IRR, its WACC, and its NPV. 11) By calculating the WACC, investors can determine the present value of the company's future cash flows. The IRR is the interest rate that sets the NPV equal to zero. Reject the project. The IRR is the interest rate that sets the present value of a projects cash inflows equal to the present value of the projects cost. WACC WACC is the Weighted Average Cost of Capital. Cash Flow Assume that all projects being considered have normal cash flows and are equally risky.a. b. Which of the following statements is CORRECT? 25.42% In this situation, you will be late delivering the order. Oe. The main formula for calculating WACC is: 6,000 a-1. D. We and our partners use cookies to Store and/or access information on a device. The lower the WACC used to calculate a project's NPV, the lower the calculated NPV will be. T2 The percentage difference between the MIRR and the IRR is equal to the projects WACC. This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here! T Assume that the 20.00% Business Finance Apply WACC in IRR. If NPV is negative, Then IRR < WACC d. The NPV of a relatively low-risk project should be found using a relatively high WACC. Year 3 60,000 At IRR, PV of, A: IF an independent project with conventional, or normal cashflow is being analyzed, the NPV and IRR, A: IRR is the actual rate of return earned on the project while the required return is the discount, A: The correct answer is option (e). Describe how you learn and adjust when an experience does not turn out as expected. Week 4 Project selection . NPV and IRR 1 .ppt - Week 4 Find the IRR of the project, and use it as the maximum adjusted WACC for accepting the project. a. $ Which of the following statements is CORRECT? a. Which of the following statements is CORRECT? Motor City Productions sells original automotive art on a prepaid basis as each piece is uniquely designed to the customer's specifications. 43,200 b. T1 Key words:- Warehouse Rental Rates, Investment This study aims to determine the rental rate of the coil warehouse to be WACC has been used by many top companies, and it has helped in making prudent investment decisions. If spot USD/INR is 50, and six months forward rate is 51 then AFM is. WACC is also a critical factor in mergers and acquisitions, where the acquirer must determine whether the proposed acquisition has a WACC that is equal to or less than the acquirer's own WACC. For example, the WACC was used by McDonald's Corporation to determine whether it should undertake a new project. Economics Finance FIN 301 Final Exam Which of the following statements is CORRECT? Experts are tested by Chegg as specialists in their subject area. If a project has "normal" cash flows, then its IRR must be positive B. Using WACC as a financial metric has its advantages and disadvantages. We can determine, A: The average daily balance is calculated by, A: Levered beta, also known as equity beta or asset beta, is a measure of a company's systematic risk, A: a.> Cost of debt:> i = Interest> MV = maturity value> Bo = Current price> n = number. Commonly, the IRR is used by companies to analyze. Apply WACC in IRR. A: Net present worth is computed using the concept of time value of money. 18.12% For a deeper understanding of the logic behind this, keep reading. The end-of-project recovery of any additional net operating working capital required to operate the project. The lower the WACC used to calculate it, the lower the calculated NPV will be.c. d. If the IRR is greater than the required rate of return, then the project is acceptable. followed by a series of inflows. Most firms generate cash inflows every day, not just once at the end of the year. Compare to the usual cost of capital, WACC is a tad bit difficult and complicated. Assume that the project being considered has normal cash flows (n one outflow followed by a series of inflows. Do these indicators suggest that the project should be undertaken? c. If each projects cost of capital were 10%, which project, if either, should be selected? If a project's NPV is less than zero, then its IRR must be less than the WACC. 23,000 ImagineeringsMARRis 18 %/year. An interest rate capitalizes 20% per year. $ (112,000) Other methods include the internal rate of return (IRR), net present value (NPV), and profitability index (PI). For a capital of $500000, how long will it take to accumulate to the sum of $86400? d. A project's regular IRR is found by compounding the initial Both projects have a cost of capital of 12 percent. project being considered has normal cash flows, with one outflow a. E. If a projects IRR is equal to its WACC, then under all reasonable conditions the projects NPV must be zero. b. a. A. Multiple IRRs can exist, but not multiple MIRRs. Start your trial now! Others expected cash inflows: If a project's IRR is positive, then its NPV must also be positive . If two projects are mutually exclusive, then they are likely to have multiple IRRs. -$12,000,000 d. What is each projects MIRR at the cost of capital of 10%? Answered: Which of the following interpretations | bartleby (5) The firm adjusts its project WACC for risk by adding 2% to the overall WACC for high-risk projects and subtracting 2% for low-risk projects. When the cost of capital is 8%, the projects have the same NPV. Another method to calculate WACC is the dividend discount model (DDM), which is based on the assumption that the value of a stock is equal to the present value of its future dividends. $5,000,000 b. What Is the Difference Between WACC and IRR? | CFO.University TO: EVERTON Major Additionally, the relative proportion of each type of capital can vary over time, which can impact the overall WACC calculation. cost at the WACC to find the terminal value (TV), then discounting 54,000 c. a. IRR First week only $4.99! e. Required fields are marked *, Prove You\'re Human * If NPV is zero, the project is _________ analyses if the benefits will justify the project cost/investment done. b. Company A recently bought software licenses for $100,000 for the first year, renewable each year for up to a total of 5 years at the same cost plus a percentage increase equal to the inflation rate. Solved Which of the following statements is CORRECT? Assume - Chegg Year 2 40,000 Become less risky overtime For each of the following problems, (a) draw the cash flow diagram; (b) present clean and clear manual solutions to the problem; (c) highlight the final answer (only the final answer as required by the problem) by enclosing it within a box. While investment analysis offers you techniques to evaluate profitability and feasibility of a project, the cost of capital helps you calculate the difference sources of capital. Year Project A Project B All costs associated with the project that have been incurred prior to the time the analysis is being conducted. For full credit, complete the entire table. 2 the inflows to equal the project's cost. The future, A: Bonds are financial instruments that represent a form of debt. IRR. The IRR calculation implicitly assumes that cash flows are withdrawn from the business rather than being reinvested in the bus O b. 0 $5500 Project B has an IRR of 14 percent. Therefore, it's essential to keep an eye on these changing factors to ensure that the company's WACC is always up-to-date and accurate. A project's NPV is generally found by compounding the cash inflows at the WACC to find the terminal value (TV), then discounting the TV at the IRR to find its PV. c. If a project's NPV is greater than zero, then its IRR must be less than the WACC. A project's NPV is found by compounding the cash inflows at the IRR to find the terminal value (TV), then discounting the TV at the WACC. An Inner charge of return is the evaluation of how a lot is the required charge of return for this investor for it to really profit the investor. If it does, would the NPV be biased up or down? 38.29%. Hint: Find the IRR of the project, and use it as the maximum adjusted WACC for accepting the project. First week only $4.99! Leeward Sailboats is reviewing the following new boat line: Click on the Icon in order to copy its content into a spreadsheet. Reject the project. 1 The lower the WACC used to calculate it, the lower the calculated NPV will be. The quiz will test your knowledge on basic social media concepts. Each component of WACC has its unique set of factors that contribute to its cost. management of the company, is required to determine a. When he arrived at work this morning, he found the following memo in his e-mail. If a projects NPV is greater than zero, then its IRR must be less than zero. FINANCE 3320- CHAPTER 11 Flashcards | Quizlet the company, A: WACC is the required rate of return, where as IRR is the actual rate of return of the project. Conventional cash flow stream is that cash flow stream in which the sign of cash flows, A: Project's Payback means the time when project's cash inflows cover the initial investments. (Do not round intermediate calculations and round your final answers to 2 decimal places.). Calculate the projects NPV, IRR MIRR, and payback. I. For further instructions on internal rate of return in Excel, see Appendix C. Apply WACC in Which of the following statements is CORRECT? Accept the project. Hint: Find the IRR of the project, and use it as the For capital budgeting projects like the one depicted in the prior problem, which of the following statements is CORRECT? What will the rate on the retirement account. If a project's IRR is smaller than the cost of capital, then its NPV will be positive.c. If a project is independent, then it cannot have multiple IRRs. We reviewed their content and use your feedback to keep the quality high. e. The IRR is the most reliable of the capital budgeting methods. d. Once you calculate the IRR, you are then asked to choose from the projects you have invested on as you get to know about the ones which are profitable and others that are not. The payback period No excel computation, Jill's Sandwiches Ltd. is considering a project that has the following cash flow data. For one project, the cash flows are estimated as follows. Spot USD/INR is 60.5600/60.5700 and one month SWAP points are 600/700 then outright forward rate will be . II. The loan that needs, A: Ratio analysis refers to the method used for measuring the quantitative terms for estimating the, A: Money laundering is a criminal activity of getting money in an illegal way or from illicit, A: Annual deposits = $1000Interest rate = 8%Period = 5 years, A: ParticularsValuesRisk Free Rate4%Expected Return of S&P Index12.00%Standard Deviation of S&P, A: Eurobonds are those bonds that are issued and denominated in a different currency than the currency, A: Net Present Value (NPV) is a financial metric used to determine the profitability of an investment, A: The concept of business values and ethics is rooted in the understanding that economic success and, A: A cash flow that goes on forever is called a perpetuity.Here the cash flow of $2000 per year forever, A: Standard deviation refers to the measurement of the dispersion of data of stock in respect to its, A: A bond is a kind of debt security issued by the government and private companies to the public for, A: Price per unit = $1700Variable cost per unit = $480Fixed cost = $4.1 millionQuantity = 95,000 units, A: Arithmetic average is the simplest average and can be obtained by adding all and divided by the, A: W RF stands for weight of riskfree asset in the portfolio. _________ are the initial outlays required to analyse a project that cannot be recovered $ (184,000) By taking into account the cost of each type of capital and the relative proportion of each in the company's capital structure, WACC provides a way for companies to evaluate investment opportunities and determine the overall cost of capital. Leeward Sailboats is reviewing the following new boat line: Click on the Icon in order to copy its content into a spreadsheet. Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. Inflation rate = 4% If the IRR is higher than the WACC, the project is financially feasible and can generate a positive return. However, it is important to note that the WACC is not a perfect measure and may have limitations in certain situations, such as when a company has a high level of financial leverage or when the market conditions are volatile. Some of our partners may process your data as a part of their legitimate business interest without asking for consent. Answer 1 points Question 5 Which of the following statements is CORRECT? Blue Hamster Manufacturing Inc. is a small firm, and several of its managers are worried about how soon the firm will be able to recover its initial investment from Project Deltas expected future cash flows. Created by haley4ms Terms in this set (32) Assuming that a project being considered has normal cash flows, with one outflow followed by a series of inflows, which of the following statements is accurate? d. The NPVs of relatively risky projects should be found using relatively low WACCs. Similarly, if there is an increase in the cost of equity or debt, the WACC will also rise. a. Payback method b. Assume that all projects being considered have normal cash flows and are equally risky. Investment 4 The advantage of using WACC is that it provides a single numeric figure in percentage terms that enables easy comparison of various investment opportunities. WACC can help you take a decision about your debt and equity financing and whether you should opt for one or the other. In capital budgeting, should we recognize this fact by estimating daily project cash flows and then using them in the analysis? (Round to two decimal places. What is this project's IRR? Category Calculate the net present value for Project A and Project B. Project A must have a higher NPV than Project B. c. If the cost of capital were less than 12 percent, Project B would have a higher IRR than Project A. d. Statements a and c are correct. On the other hand, if a company has a higher proportion of equity, the cost of equity will have a greater impact on the overall WACC. Year 0 -440,000 (Ch. If a project's IRR is equal to its cost of capital, then under all reasonable conditions the project's NPV must be zero.c. FROM: J. C. Bens, CFO, Proven Investment Ltd. Learn about the importance of debt-to-equity ratio in financial analysis and how it affects a company's financial health. c. c. A project's MIRR can never exceed its IRR. Duration is, A: The given details related to the sugar futures contract are:MonthPositionContractPriceNo. These factors can impact the cost of capital and the overall WACC calculation, which can in turn affect investment decisions and the financial performance of the company. Group of answer choices The lower the WACC used to calculate it, the lower the calculated NPV will be. If a project's NPV is greater than zero, then its IRR must be less than zero. For a project to have more than one IRR, then both IRRs must be greater than the WACC. A: The 2008 recession also known as global financial crisis was a severe worldwide economic downturn, A: NPV represents the aboslute measuer of profitabily generated by a project and is expressed in dollar, A: Assets are resources or items that have value and can be owned, controlled, or utilized to generate, A: The weighted average cost of capital refers to the average of all costs of capital that are from, A: Foreign exchange market includes trading one currency for another at predetermined exchange rates, A: NPV is also known as Net present value. Which of the following statements is most correct? d. If a projects IRR is positive, then its NPV must also be positive. A: If the internal rate of return equals the required return, the net present value will equal zero. Consider the case of Blue Hamster Manufacturing Inc.: Which of the following statements is CORRECT? 84,000 Year 8 160,000 So, the correct, A: Year Normal vs. nonnormal cash flows Answer: a EASY 34. $636,000 Define each of the following terms: Answered: If the decision is made by choosing the | bartleby
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