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Memphic Memphic
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4 years ago
If the Krusty Krab's opportunity cost of capital is 12%, what decision should the Krusty Krab take regarding the new grill?
A) Do not install the new grill since NPV is approximately = - $10,630
B) Install the new grill since NPV is approximately = + $10,630
C) Install the new grill since IRR is approximately = 15%
D) Don't install the new grill since IRR is less than 12%
Textbook 

Corporate Finance: The Core


Edition: 4th
Authors:
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EgorGruzdevEgorGruzdev
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4 years ago
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B
Explanation:  B) CF0 = -80,000 + 30,000 + .35(40,000 - 30,000) [tax write off old grill sold at loss] = -46,500
Incremental EBITDA = 50,000 - 35,000 = 15,000
Incremental Depreciation = 80,000/8 - 50,000/10 = 5000
Incremental cash flow (years 1 - 8) = (15,000 - 5000) × (1 - .35) + 5000 = 11,500
CF0 = -46,500, CFj = 11,500. nj = 8, I = 12, compute NPV = 10,627.86;
compute IRR = 18.27%
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