7. 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?
15. In what ways the higher interest rates in the United States than abroad interfere with the international competitiveness of U.S. firms?
8. Problem 8 John Piderit, the general manager 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?
Project A Project B Project C
Present value $3,000,000 $1,750,000 $1,400,000
Of net cash flows
Initial cost 2,400,000 1,3000,000 1,100,000
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 the common stock of the company currently 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.
The solution tackles a number of accounting questions including the uses of NPV and IRR methods, the accounts for Western Tool Company, and calculations for the MacBurger Company.