Look at the cash flows for projects F and G given below. Cash Flows($) Project C0 C1 C2 C3 C4 C5 C6 C7 C8 IRR (%) NPV at 10% F (7,500 ) 5,000 5,000 5,000 0 0 0 0 0 44.6 4,934 G (7,500 ) 2,400 2,400 2,400 2,400 2,400 2,400 2,400 2,400 27.4 5,304 The cost of capital was assumed to be 10%. Assume that the forecasted cash flows for projects of this type are overstated by 8% on average. That is, the forecast for each cash flow from each project should be reduced by 8%. But a lazy financial manager, unwilling to take the time to argue with the projects’ sponsors, instructs them to use a discount rate of 18%. a. What are the projects’ true NPVs? (Do not round intermediate calculations. Round your answers to nearest dollar amount.) b. What are the NPVs at the 18% discount rate? (Do not round intermediate calculations. Round your answers to nearest dollar amount.)
Look at the cash flows for projects F and G given below. Cash Flows($) Project C0 C1 C2 C3 C4 C5 C6 C7 C8 IRR (%) NPV at 10% F (7,500 ) 5,000 5,000 5,000 0 0 0 0 0 44.6 4,934 G (7,500 ) 2,400 2,400 2,400 2,400 2,400 2,400 2,400 2,400 27.4 5,304 The cost of capital was assumed to be 10%. Assume that the forecasted cash flows for projects of this type are overstated by 8% on average. That is, the forecast for each cash flow from each project should be reduced by 8%. But a lazy financial manager, unwilling to take the time to argue with the projects’ sponsors, instructs them to use a discount rate of 18%. a. What are the projects’ true NPVs? (Do not round intermediate calculations. Round your answers to nearest dollar amount.) b. What are the NPVs at the 18% discount rate? (Do not round intermediate calculations. Round your answers to nearest dollar amount.)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Look at the cash flows for projects F and G given below.
| Cash Flows($) | |||||||||||||||||||||||
| Project | C0 | C1 | C2 | C3 | C4 | C5 | C6 | C7 | C8 | NPV at 10% | |||||||||||||
| F | (7,500 | ) | 5,000 | 5,000 | 5,000 | 0 | 0 | 0 | 0 | 0 | 44.6 | 4,934 | |||||||||||
| G | (7,500 | ) | 2,400 | 2,400 | 2,400 | 2,400 | 2,400 | 2,400 | 2,400 | 2,400 | 27.4 | 5,304 | |||||||||||
The cost of capital was assumed to be 10%. Assume that the forecasted cash flows for projects of this type are overstated by 8% on average. That is, the
a. What are the projects’ true NPVs? (Do not round intermediate calculations. Round your answers to nearest dollar amount.)
b. What are the NPVs at the 18% discount rate? (Do not round intermediate calculations. Round your answers to nearest dollar amount.)
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