Which of the following statements is CORRECT? Sunk costs were formerly hard to d

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Which of the following statements is CORRECT? Sunk costs were formerly hard to dent with, but once live NPV method came into wide use, it became possible to simply include stink m the cash flows and then calculate mo project's NPV. A good example of a sunk cost is a situation where Home Depot opens a new store, and that leads to a decline in sales of one of the firm's existing stores, A sunk cost is any cost that was expended in the past but can be recovered if the sum decides not to go forward with the project. A sunk cost is any cost that must be expended in order to complete a project and bring it into operation. Company is considering a project that has the following cash flow data. What is the projects IRR? Note that a project's projected IRR can be less than the WACC or negative, in both cases it will be rejected. Duval Inc. uses only equity capital, and it has two equally-sized divisions. Division A's cost of capital is 10 0% Division B's cost is 14.0%, and the corporate (composite) WACC is 12.0%. AW of Division A's projects are equality risky, as are all of Division B s projects. However, the projects of Division A are W risky than those of Division Which of the following projects should the firm accept? . A Division B project with a 13% return. A Division A project with a 9% return. A Division B project with a 12% return. A Division A project with an 11% return. A Division B project with an 11 % return.

Explanation / Answer

9. Depreciated cost = 75% of 11,000 = 8250

Book value = 11000-8250 = 2750

Sale Value = 6000

So taxable value = 6000 -2750 = 3250

Taxes = 0.4* 3250 = 1300

Hence Salavge value = 6000-1300 = 4,700 (Option e)

10. Answer is option (a)

11. The irr is calculates using excel's IRR formula = irrr(Cash_flow_range)

IRR = 8.86%(option C)

12 Thefirm should accept the project of division A with rerturn greater than 10% or a project of division B with return greater than 14%

Consdiering these, they shouldselect Option d: A divsion A project with an 11% return (Option D)

Year Cash flow 0 -1300 1 400 2 400 3 400 4 400 IRR 8.86%

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