Question

How would the discount rate used to evaluate a replacement or repair project, such as a leaky roof, be different from the discount rate for an investment in a new product or service? Why would the discount rates differ?

Answer #1

Why is the rate used to discount FCFF different from the rate
used to discount FCFE?

A project has an NPV of £12,632 when a discount rate
of 12% is used and the same project has an NPV of (£6,935) when a
discount rate of 24% is used. The approximate internal rate of
return of the project is:
Select one:
a. 18.5%
b. 15.16%
c. 20.5%
d. 19.75%
An investment project costs $10,500 and will generate $4,000 in
annual cash flows for five years. What is the exact internal rate
of return (IRR)?
Select one:
a....

What is the discount rate? How does it differ from the federal
funds rate? Describe how the Fed affects each of these interest
rates.

5. Solving for the WACC
The WACC is used as the discount rate to evaluate various
capital budgeting projects. However, it is important to realize
that the WACC is an appropriate discount rate only for a project of
average risk.
Analyze the cost of capital situations of the following company
cases, and answer the specific questions that finance professionals
need to address.
Consider the case of Turnbull Co.
Turnbull Co. has a target capital structure of 58% debt, 6%
preferred...

If you are using a discount rate of 8% to evaluate the
acquisition of an Ultrasound Machine, and the IRR is 8%, what can
you conclude about the ROI of the project? Would you recommend
investing in the proposed project?

Which of the following criteria is NOT taken into
consideration when analyzing a possible replacement
project?
The cashflows the current project has generated in the past.
The discounted cash flows from the old and potential replacement
investment.
The depreciation associated with the old and potential
replacement investment.
The sunk cost associated with the original project.
A company is considering a project that has a discount
rate of 5%. In the first year, it will have -$100,000 in cash
flows. In...

Adams Auto Repair,
Inc. is evaluating a project to purchase equipment that will not
only expand the company’s capacity but also improve the quality of
its repair services. The board of directors requires all capital
investments to meet or exceed the minimum requirement of a 10
percent rate of return. However, the board has not clearly defined
the rate of return. The president and controller are pondering two
different rates of return: unadjusted rate of return and internal
rate of...

An increase in the discount rate used in DCF analysis of a
project penalizes the cash flows from its later years more than
those from its early years.
True
False

The discount rate that is used for calculating the present
values of a project's cash flows is the rate of return on other
investments, which have lower risk than that of the project.
True
False
Diversification helps the investor to significantly reduce the
standard deviation of their investment as they create a portfolio
by allocating their investment to different securities.
True
False
Variance of an investment's returns shows the exact percentage
of the investment's risk.
True
False

Solomon Auto Repair, Inc. is evaluating a project to purchase
equipment that will not only expand the company’s capacity but also
improve the quality of its repair services. The board of directors
requires all capital investments to meet or exceed the minimum
requirement of a 10 percent rate of return. However, the board has
not clearly defined the rate of return. The president and
controller are pondering two different rates of return: unadjusted
rate of return and internal rate of...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 7 minutes ago

asked 8 minutes ago

asked 22 minutes ago

asked 27 minutes ago

asked 53 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago

asked 2 hours ago

asked 3 hours ago

asked 3 hours ago

asked 3 hours ago