Principles of Corporate Finance_ 12th Edition

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Chapter 5 Net Present Value and Other Investment Criteria 131


bre44380_ch05_105-131.indd 131 09/02/15 04:05 PM


You: It’s not clear which project is better. The high-temperature process appears to be less effi-
cient. It has higher operating costs and generates less total revenue over the life of the project,
but of course it generates more cash flow in years 1 to 5.


CFO: Maybe the processes are equally good from a financial point of view. If so we’ll stick with
the low-temperature process rather than switching at the last minute.


You: We’ll have to lay out the cash flows and calculate NPV for each process.


CFO: OK, do that. I’ll be back in a half hour—and I also want to see each project’s true, DCF rate
of return.


QUESTIONS



  1. Are the book rates of return reported in Tables 5.1 and 5.2 useful inputs for the capital invest-
    ment decision?

  2. Calculate NPV and IRR for each process. What is your recommendation? Be ready to explain
    to the CFO.

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