Explore BrainMass
Share

cost of capital

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

1) Projects c and d both have normal cash flows. In other words, there is an up-front cost followed over time by a series of positive cash flows. Both projects have the same risk and a WACC equal to 10 percent. However, Project c has a higher internal rate of return than Project d. Assume that changes in the WACC have no effect on the projects? cash flow levels. Which of the following statements is most correct?

a. Project c must have a higher net present value than Project d.
b. If Project c has a positive NPV, Project d must also have a positive NPV.
c. If Project C's WACC falls, its internal rate of return will increase.
d. If Projects c and d have the same NPV at the current WACC, Project d would have a higher NPV if the WACC of both projects was lower.
e. Statements b and c are correct.

Reason for answer ?

2) Marlowe corp is considering two mutually exclusive projects. Project A has an internal rate of return of 18 percent, while Project B has an internal rate of return of 30 percent. The two projects have the same risk, the same cost of capital, and the timing of the cash flows is similar. Each has an up-front cost followed by a series of positive cash flows. One of the projects, however, is much larger than the other. If the cost of capital is 16 percent, the two projects have the same net present value (NPV); otherwise, their NPVs are different. Which of the following statements is most correct?

a. If the cost of capital is 12 percent, Project B will have a higher NPV.
b. If the cost of capital is 17 percent, Project B will have a higher NPV.
c. Project B is larger than Project A.
d. Statements a and c are correct.
e. Statements b and c are correct

Reason for answer?

© BrainMass Inc. brainmass.com October 24, 2018, 9:16 pm ad1c9bdddf
https://brainmass.com/economics/finance/cost-of-capital-121993

Solution Preview

I have added the explanations with each statement.

1) a. Project c must have a higher net present value than Project d.
This may not be correct if the investment in project c is low and investment in project d is higher.

b. If Project c has a positive NPV, Project d must also have a positive NPV.
This may not be correct howver the reverse is true i.e. if project d has a positive NPV, project d will have a positive NPV.

c. If Project C's WACC falls, its internal rate of return will increase.
This is incorrect. IRR is not affected by the WACC.

d. If Projects c and d ...

Solution Summary

Capital Budgeting is assessed.

$2.19
See Also This Related BrainMass Solution

Market Rates and Cost of Capital

Please see attached file for tables.

What does a company's cost of capital represent and how is it calculated? How do market rates and the company's perceived market risk impact its cost of capital, and how does the company's debt to equity mix impact this cost of capital? Using the information provided, develop a spreadsheet to calculate weighted average cost (WAC) and marginal weighted average cost (MCC) of capital for Strident Marks?

You have developed the following table concerning the cost of capital sources for Strident Marks:
The future investment opportunities and the corresponding Internal Rate of Return (IRR) follow. As a result of operating its business operations profitably, Strident Marks has $1,000,000 to invest. Considering Strident Marks' weighted average cost of capital and MCC, rank the investment opportunities and indicate which ones would be accepted, which (if any) would be rejected and why.

View Full Posting Details