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a) When can the NPV and the IRR methods of evaluating investment
projects provide contradictory results?
b) How can this arise?
c) Which method should then be used? Why?
Problem 8: John Piderit, the general management of the Western Tool
Company, is considering introducing some new tools to the company’s
product line. The top management of the firm has identified three types
of tools (referred to as projects A, B, and C). The various divisions of
the firm have provided the data given in the following table on these
three possible projects. The company has a limited capital budget of $2.4
million for the coming year.
a) Which project(s) would the firm undertake if it used the NPV
investment criterion?
b) Is this the correct decision? Why?
Problem 10: The MacBurger Company, a chain of fast-food restaurants,
expects to earn $200 million after taxes for the current year. The
company has a policy of paying out half of its net after-tax income to the
holders of the company’s 100 million shares of common stock. A share
of common stock of the company current sells for eight times current
earnings. Management and outside analysts expect the growth rate of
earnings and dividends for the company to be 7.5 percent per year.
Calculate the cost of equity capital to this firm.
Spreadsheet Problem 1: The benefits and costs of an investment project
(the purchase of a piece of machinery) are those given in the following
table. In excel, calculate the net revenue, or the revenue from the
investment minus the costs; the present value coefficient for every year,
and the present value of the net revenue. Add together column F to get
the net present value of the project. Should the firm purchase the
machine?
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BUSI 620 Week 8 Test 2 (100 % Score)