FIN 534 – Homework Set #4

FIN 534 – Homework Set #4
Directions: Answer the following questions on a separate document. Explain how you reached the answer
or show your work if a mathematical calculation is needed, or both. Submit your assignment using the
assignment link in the course shell. This homework assignment is worth 100 points.
Use the following information for Questions 1 through 3:
Assume you are presented with the following mutually exclusive investments whose expected net cash
flows are as follows:
EXPECTED NET CASH FLOWS:
Year

Project A

Project B

0

−$400

−$650

1

−528

210

2

−219

210

3

−150

210

4

1,100

210

5

820

210

6

990

210

7

−325

210

1. (a) What is each project’s IRR?
(b) If each project’s cost of capital were 10%, which project, if either, should be selected? If the
cost of capital were 17%, what would be the proper choice?
2. (a) What is each project’s MIRR at the cost of capital of 10%? At 17%? (Hint: Consider Period 7
as the end of Project B’s life.)
3. What is the crossover rate, and what is its significance?

© 2015 Strayer University. All Rights Reserved. This document contains Strayer University Confidential and Proprietary information
and may not be copied, further distributed, or otherwise disclosed in whole or in part, without the expressed written permission of
Strayer University.
FIN 534 Homework Set #4 1156 (5-19-2015)
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FIN 534 – Homework Set #4
Use the following information for Question 4:
The staff of Porter Manufacturing has estimated the following net after-tax cash flows and probabilities for
a new manufacturing process:
Line 0 gives the cost of the process, Lines 1 through 5 give operating cash flows, and Line 5* contains the
estimated salvage values. Porter’s cost of capital for an average-risk project is 10%.
Net After-Tax Cash Flows
Year
P = 0.2
P = 0.6
0
−$100,000
−$100,000
1
20,000
30,000
2
20,000
30,000
3
20,000
30,000
4
20,000
30,000
5
20,000
30,000
5*
0
20,000

P = 0.2
−$100,000
40,000
40,000
40,000
40,000
40,000
30,000

4. Assume that the project has average risk. Find the project’s expected NPV. (Hint: Use expected
values for the net cash flow in each year.)

© 2015 Strayer University. All Rights Reserved. This document contains Strayer University Confidential and Proprietary information
and may not be copied, further distributed, or otherwise disclosed in whole or in part, without the expressed written permission of
Strayer University.
FIN 534 Homework Set #4 1156 (5-19-2015)
Page 2 of 2