Purchase Solution

NPV

Not what you're looking for?

Ask Custom Question

Look back to the cash flows for projects F and G in Section 5 (page 112; also below). The cost of capital was assumed to be 10%. Assume that the forecasted cash flows for projects of this type are overstated by 8% on average. That is, the forecast for each cash flow from each project should be reduced by 8%. But a lazy financial manager, unwilling to take the time to argue with the project's sponsors, instructs them to use a discount rate of 18%.
a. What are the projects' true NPVs?

b. What are the NPVs at the 18% discount rate?

c. Are there any circumstances in which the 18% discount rate would give the correct NPVs? (Hint: Could upward bias be more severe for more-distant cash flows?)

C0 C1 C2 C3 C$ C5
F -9,000 6,000 5,000 4,000 0 0
G -9,000 1,800 1,800 1,800 1,800 1,800

Answers:

A. Formula Calculation TIP: Use POWER function to calculate (1+r)^t
NPV-Project F T C

NPV-Project G T C

B.
NPV-Project F T C

NPV-Project G T C

C.
T

Attachments
Purchase this Solution
Solution Summary

The solution does a great job of answering the question. The solution is brief and concise and very easy to follow along. All the steps are clearly shown and Excel formulas are provided so that the student can answer similar questions in the future. It can be easily understood by anyone with a basic understanding of the topic. Overall, an excellent solution.

Solution Preview

Dear Student

Please see the attachment. For question 4, the level of Sales has not been provided. ...

Purchase this Solution
Free BrainMass Quizzes
Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

View More Free Quizzes
Related BrainMass Solutions

  • NPV, IRR, and Sensitivity Analysis

    cash flow Year Cash flow ;+NPV ;-NPV ;+NPV ;-NPV ;+NPV ;-NPV 0 -$42,000 2% 3% 1.00 1.00 -$42,000 -$42,000 1..10 $4,700 2% 3% 8.98 8.53 $42,218 $40,092 NPV $218 -$1,908 IRR 2.10% 10% Decrease Discount

  • Expected NPV and standard deviation of NPV with real example

    What are the project's expected NPV and standard deviation of NPV? b. Should the base case analysis use the most likely NPV or expected NPV? Explain your answer. a.

  • NPV

    126133 NPV You have estimated 3 possible NPV outcomes for an investment under analysis, the expected NPV, the best case NPV and the worst case NPV. You have also gotten estimates from management on the probability of each of these three cases.

  • Coefficeint of variation of NPV

    (Expected NPV and standard deviation of NPV in thousands). The expected NPV, standard deviation of NPV, and coefficeint of variation of NPV is calculated when a probability distribution of NPV is given.

  • Calculating NPV at Various Discount Rates

    What is the NPV at a discount rate of 11 percent? What is the NPV at a discount rate of 21 percent? What is the NPV at a discount rate of 29 percent?

  • NPV, IRR and Profitability Index

    NPV=0.

  • NET PRESENT VALUE and internal rate of return FOR CAPITAL

    You can get the NPV for 0%. 4% NPV would be $46,822.37 8% NPV would be -$7,831.63 10% NPV would be -$32,419.23 NPV is calculated by finding the present value of each cash flow, including both cash inflows and outflows, discounted

  • NPV analysis of Jameson Cargile, Inc.

    NPV is just for analysis. B. The YellowJacket is a better choice because the negative NPV is greater than the negative NPV associated with the Bumblebee. C.

  • Internal rate of return

    the discount rate that makes NPV negative. the rate of return that makes the NPV positive. One disadvantage of the NPV method is that: Answer the NPV deals with cash flows.

  • Calculating Net Present Value

    PI= (I+NPV) / I where I=Investment if PI>0 then {(I+NPV) / I}>0 which means NPV> -I meaning NPV>0 where <0> is the limit of I NPV=0={C1 / (1+IRR)}-I={C1 / (1+k)}-I where C1 is the expected future net cash flow that means IRR=K As stated from

View More Related Solutions