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NPV versus IRR Consider the following cash flows on two mutually exclusive projects for the Bahamas Recreation Corporation (BRC). Both projects require an annual return of 14 percent. Year Deepwater Fishing New Submarine Ride 0 −$850,000 −$1,650,000 1 320,000 810,000 2 470,000 750,000 3 410,000 690,000 As a financial analyst for BRC, you are asked the following questions: If your decision rule is to accept the project with the greater IRR, which project should you choose? Because you are fully aware of the IRR rule’s scale problem, you calculate the incremental IRR for the cash flows. Based on your computation, which project should you choose? To be prudent, you compute the NPV for both projects. Which project should you choose? Is it consistent with the incremental IRR rule?
The average age of engineering student at graduation is a little over 23 years. This means that the working career of most engineers is almost exactly 500 months. How much would an engineer need to save each month to become a millionaire by the end o..
In 2013 Caterpillar Inc. had about 652 million shares outstanding. Their book value was $31 per share, and the market price was $85.50 per share. The company’s balance sheet shows that the company had $21.7 billion of long-term debt, which was curren..
You are told that you will need to accumulate $1,400,000 by day one of retirement in order to achieve your desired standard of living. How much will you need to contribute at the end of each year to accumulate that sum given the following information..
Describe the difference between a stack hedge and a strip hedge. What are the advantages and disadvantages of each?
The transaction motive for holding cash refers to the need to have cash for which one of the following purposes?
McKenna Sports Authority is getting ready to produce a new line of gold clubs by investing $1.85 million. The investment will result in additional cash flows of $525,000, $827,500, and $1,245,000 over the next three years. What is the payback period ..
UM Graduation Supplies has debt-to-equity ratio of 80%, profit margin of 10%, total sales of 10 million and total assets of 5 million. The president is unhappy with the current return on equity, and he thinks it could be doubled. This could be accomp..
You wrote ten call option contracts on JIG stock with a strike price of $41 and an option price of $.60. What is your net gain or loss on this investment if the price of JIG is $46.05 on the option expiration date?
We are evaluating a project that costs $1,180,000, has a five-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 88,100 units per year. Suppose the projections g..
Describe the risk/return relationship. Provide an example of two security investments that illustrate the risk/return relationship
Levin Furniture buys a living room set with a $4,000 list price and a 55% trade discount. Freight (FOB shipping point) of $50 is not part of the list price. What is the delivered price (including freight) of the living room set, assuming a cash disco..
D’s employer owed D $1,500 in salary that had not been paid at time of death. Is D’s right to that amount includable in D’s gross estate? What if the $1,500 is a benefit that D’s employer agreed to pay to D or D’s estate only if D continued to work f..
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