2. Cement Inc. is considering an investment opportunity that requires an initial outlay equal to $575,000....
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
2. Cement Inc. is considering an investment opportunity that requires an initial outlay equal to $575,000. In years 1 and 2 the net cash flows are expected to equal $500,000. The required rate of return is 25% p.a. 2.a Given that the Cement Inc.'s criterion whether to invest or not is the project's internal rate of return (IRR), should the 2.b After observing the managers' decision, a shrewd businessman offers the managers of Cement Inc. the following modified project. The businessman offers that the firm will pay the initial outlay $575,000 only in year 2 and receive the $500,000 in years 0 and 1. As a compensation for receiving this offer, the businessman proposes that the firm pay him $1,100,000 in year 3. Cement Inc.'s CFO argues that according to the IRR criterion the proposal is profitable since the 25% required rate of return is lower then the new IRR for this investment. Is the CFO correct in his argument that the required rate of return is lower then the IRR? Does this decision rule lead to optimal investment by the firm? firm's managers invest in this project? Is the IRR criterion the correct decision rule in this case? 2. Cement Inc. is considering an investment opportunity that requires an initial outlay equal to $575,000. In years 1 and 2 the net cash flows are expected to equal $500,000. The required rate of return is 25% p.a. 2.a Given that the Cement Inc.'s criterion whether to invest or not is the project's internal rate of return (IRR), should the 2.b After observing the managers' decision, a shrewd businessman offers the managers of Cement Inc. the following modified project. The businessman offers that the firm will pay the initial outlay $575,000 only in year 2 and receive the $500,000 in years 0 and 1. As a compensation for receiving this offer, the businessman proposes that the firm pay him $1,100,000 in year 3. Cement Inc.'s CFO argues that according to the IRR criterion the proposal is profitable since the 25% required rate of return is lower then the new IRR for this investment. Is the CFO correct in his argument that the required rate of return is lower then the IRR? Does this decision rule lead to optimal investment by the firm? firm's managers invest in this project? Is the IRR criterion the correct decision rule in this case?
Expert Answer:
Related Book For
Posted Date:
Students also viewed these finance questions
-
This case study on project evaluation is applicable for beginning courses in corporate finance or finance strategy. Two alternative investment options are available to evaluate. Challenges are...
-
After graduating from business school, George Clark went to work for a Big Six accounting firm in San Francisco. Because his hobby has always been wine making, when he had the opportunity a few years...
-
a. What is capital budgeting? b. What is the difference between independent and mutually exclusive projects? c. (1) Define the term net present value (NPV). What is each franchise's NPV? (2) What is...
-
Visit any social media site with news stories that includes a photograph/snapshot of story (mandatory) . Choose ONE news story. Use the questions below to help you determine validity of that ONE news...
-
If x > 0, then (In x)6 = 6 In x.
-
Assume the MARR is 10% per year for this analysis. A presently owned machine that was purchased 8 years ago for $450,000 is under consideration for replacement. It has an annual operating cost of...
-
Covered Interest Arbitrage. Assume the following information: Given this information, is covered interest arbitrage worthwhile for Mexican investors who have pesos to invest? Explain your answer....
-
On a mountain trek, you discover a 6-ounce gold nugget. A friend offers to pay you $2,500 for it. How do you check whether this is a fair price?
-
Luzadis Company makes furniture using the latest automated technology. The company uses a job-order costing system and applies manufacturing overhead cost to products on the basis of machine-hours....
-
Which of the following is a positive reason for learning chemistry? (a) Chemistry is relevant to daily life (b) Chemistry offers career opportunities (c) Chemistry studies interesting topics (d)...
-
When considering the organization as a system, what comprises the interrelated subsystems? Question 9 Answer a . Isolated departments b . Structure, culture, strategy, policies, and capacity c ....
-
Dynamite Pty Ltd paid annual gross wages of $1,320,000. The monthly gross wagesand amounts of payroll tax paid, not including fringe benefits, were as follows: Gross WagesGross Wages July$ 80,000...
-
In the context of urban sociology, discuss the significance of "place-making" and its impact on community identity and social cohesion. How do gentrification and urban renewal projects affect...
-
Show the NRZ encoding for the following bit pattern. Bits 0 1 0 0 1 1 0 1 1 0 1 0 1 1 1 1 I I I 1 I I I 1 1 1 1 I 1 I 1 1 1 II I 1 I I 1 II NRZ Clock Question 2. How does clock drift occur? Man II I...
-
Influencer marketing on social platforms is integral to marketing campaigns of many brands. For FYiDoctors, it is also vital for the brand. FYIDoctors currently haven't hired any influencers, but it...
-
How do intersectionality and critical race theory challenge traditional paradigms of sociological analysis in understanding structural inequality ?
-
Carnes Cosmetics Co.'s stock price is $43, and it recently paid a $1.50 dividend. This dividend is expected to grow by 26% for the next 3 years, then grow forever at a constant rate, g; and rs = 16%....
-
You work as an operations consultant for a textile company. Your client has a well-established distribution system in the US market. The company has hundreds of stores and four distribution centers....
-
Refer to Exercise A.26. Now suppose that neither patients nor doctors knew what group the patients belonged to. a. Is this an observational study or a designed experiment? Explain. b. Is this a...
-
Briefly explain when a one-way ANOVA procedure is used to make a test of hypothesis.
-
According to a Gallup poll, 92% of Americans believe in God (Time, June 20, 2011). Suppose that this result is true for the current population of adult Americans. What is the probability that the...
-
1. Several successful chains of warehouse stores such as Costco have merchandising policies that differ considerably from those of traditional department stores. Identify characteristics of these...
-
The Ibunez Tool Company has two products: a plain circular saw and a fancy circular saw. The plain circular saw sells for $66 and has a variable cost of $50. The fancy circular saw sells for $100 and...
-
The following is the income statement of a manufacturer of blue jeans: Hunter had manufactured 2 million units, which had been sold to various clothing wholesalers and department stores. In early...
Study smarter with the SolutionInn App