Question

A firm is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO wants to use the IRR criterion, while the CFO favors the NPV method. You were hired to advise the firm on the best procedure. If the wrong decision criterion is used, how much potential value would the firm lose?

WACC:	6.75%
	0	1	2	3	4
CFS	-$1,025	$380	$380	$380	$380
CFL	-$2,150	$765	$765	$765	$765

a. $186.47

b. $182.74

c. $218.17

d. $214.44

e. $220.03

Jazz World Inc. is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected.

WACC:	9.75%
Year	0	1	2	3	4
Cash flows	-$1,200	$400	$425	$450	$475

a. -$185.11

b. -$222.13

c. -$174.00

d. -$157.34

e. -$198.07

tern Associates is considering a project that has the following cash flow data. What is the project's payback?

Year	0	1	2	3	4	5
Cash flows	-$975	$300	$310	$320	$330	$340

a. 3.14 years

b. 2.42 years

c. 2.54 years

d. 3.61 years

e. 3.83 year A store has 5 years remaining on its lease in a mall. Rent is $2,000 per month, 60 payments remain, and the next payment is due in 1 month. The mall's owner plans to sell the property in a year and wants rent at that time to be high so that the property will appear more valuable. Therefore, the store has been offered a "great deal" (owner's words) on a new 5-year lease. The new lease calls for no rent for 9 months, then payments of $2,500 per month for the next 51 months. The lease cannot be broken, and the store's WACC is 12% (or 1% per month). Should the new lease be accepted? (Hint: Be sure to use 1% per month.) -Select-YesNoItem 1 If the store owner decided to bargain with the mall's owner over the new lease payment, what new lease payment would make the store owner indifferent between the new and old leases? (Hint: Find FV of the old lease's original cost at t = 9; then treat this as the PV of a 51-period annuity whose payments represent the rent during months 10 to 60.) Do not round intermediate calculations. Round your answer to the nearest cent. $   The store owner is not sure of the 12% WACC—it could be higher or lower. At what nominal WACC would the store owner be indifferent between the two leases? (Hint: Calculate the differences between the two payment streams; then find its IRR.) Do not round intermediate calculations. Round your answer to two decimal places.   %

Answer 1

1)