Question_TB10_12Dec_3rd

[i]. Heller Airlines is considering two mutually exclusive projects, A and B. The projects have the same risk. Below are the cash flows from each project:

Project A Project B

Year Cash Flow Cash Flow

0 -$2,000 -$1,500

1 700 300

2 700 500

3 1,000 800

4 1,000 1,100

At what cost of capital would the two projects have the same net present value (NPV)?

a. 68.55%

b. 4.51%

c. 26.67%

d. 37.76%

e. 40.00%

[ii]. Bowyer Robotics is considering two mutually exclusive projects with the following after-tax operating cash flows:

Project 1 Project 2

Year Cash Flow Cash Flow

0 -$400 -$500

1 175 50

2 100 100

3 250 300

4 175 550

At what cost of capital would these two projects have the same net present value (NPV)?

a. 10.69%

b. 16.15%

c. 16.89%

d. 20.97%

e. 24.33%

[iii]. Company C is considering two mutually exclusive projects, Project A and Project B. The projects are equally risky and have the following cash flows:

Project A Project B

Year Cash Flow Cash Flow

0 -$300 -$300

1 140 500

2 360 150

3 400 100

At what cost of capital would the two projects have the same net present value (NPV)?

a. 10%

b. 15%

c. 20%

d. 25%

e. 30%

[iv]. Michigan Mattress Company is considering the purchase of land and the construction of a new plant. The land, which would be bought immediately (at t = 0), has a cost of $100,000 and the building, which would be erected at the end of the first year (t = 1), would cost $500,000. It is estimated that the firm’s after-tax cash flow will be increased by $100,000 starting at the end of the second year, and that this incremental flow would increase at a 10 percent rate annually over the next 10 years. What is the approximate payback period?

a. 2 years

b. 4 years

c. 6 years

d. 8 years

e. 10 years

[v]. Haig Aircraft is considering a project that has an up-front cost paid today at t = 0. The project will generate positive cash flows of $60,000 a year at the end of each of the next five years. The project’s NPV is $75,000 and the company’s WACC is 10 percent. What is the project’s regular payback?

a. 3.22 years

b. 1.56 years

c. 2.54 years

d. 2.35 years

e. 4.16 years

[vi]. Lloyd Enterprises has a project that has the following cash flows:

Project

Year Cash Flow

0 -$200,000

1 50,000

2 100,000

3 150,000

4 40,000

5 25,000

The cost of capital is 10 percent. What is the project’s discounted payback?

a. 1.8763 years

b. 2.0000 years

c. 2.3333 years

d. 2.4793 years

e. 2.6380 years

[vii]. Polk Products is considering an investment project with the following cash flows:

Project

Year Cash Flow

0 -$100,000

1 40,000

2 90,000

3 30,000

4 60,000

The company has a 10 percent cost of capital. What is the project’s discounted payback?

a. 1.67 years

b. 1.86 years

c. 2.11 years

d. 2.49 years

e. 2.67 years

[viii]. Davis Corporation is faced with two independent investment opportunities. The corporation has an investment policy that requires acceptable projects to recover all costs within 3 years. The corporation uses the discounted payback method to assess potential projects and utilizes a discount rate of 10 percent. The cash flows for the two projects are:

Project A Project B

Year Cash Flow Cash Flow

0 -$100,000 -$80,000

1 40,000 50,000

2 40,000 20,000

3 40,000 30,000

4 30,000 0

In which investment project(s) should the company invest?

a. Project A only.

b. Neither Project A nor Project B.

c. Project A and Project B.

d. Project B only.

NPV

[ix]. The Seattle Corporation has been presented with an investment opportunity that will yield end-of-year cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10. This investment will cost the firm $150,000 today, and the firm’s cost of capital is 10 percent. What is the NPV for this investment?

a. $135,984

b. $ 18,023

c. $219,045

d. $ 51,138

e. $ 92,146

[x]. You are considering the purchase of an investment that would pay you $5,000 per year for Years 1-5, $3,000 per year for Years 6-8, and $2,000 per year for Years 9 and 10. If you require a 14 percent rate of return, and the cash flows occur at the end of each year, then how much should you be willing to pay for this investment?

a. $15,819.27

b. $21,937.26

c. $32,415.85

d. $38,000.00

e. $52,815.71

[xi]. Brown Grocery is considering a project that has an up-front cost of $X. The project will generate a positive cash flow of $75,000 a year. Assume that these cash flows are paid at the end of each year and that the project will last for 20 years. The project has a 10 percent cost of capital and a 12 percent internal rate of return (IRR). What is the project’s net present value (NPV)?

a. $1,250,000

b. $ 638,517

c. $ 560,208

d. $ 78,309

e. $ 250,000

[xii]. The following cash flows are estimated for two mutually exclusive projects:

Project A Project B

Year Cash Flow Cash Flow

0 -$100,000 -$110,000

1 60,000 20,000

2 40,000 40,000

3 20,000 40,000

4 10,000 50,000

When is Project B more lucrative than Project A? That is, over what range of costs of capital (k) does Project B have a higher NPV than Project A? Choose the best answer.

a. For all values of k less than 7.25%.

b. Project B is always more profitable than Project A.

c. Project A is always more profitable than Project B.

d. For all values of k less than 6.57%.

e. For all values of k greater than 6.57%.

[xiii]. Shannon Industries is considering a project that has the following cash flows:

Project

Year Cash Flow

0 ?

1 $2,000

2 3,000

3 3,000

4 1,500

The project has a payback of 2.5 years. The firm’s cost of capital is 12 percent. What is the project’s net present value (NPV)?

a. $ 577.68

b. $ 765.91

c. $1,049.80

d. $2,761.32

e. $3,765.91

[xiv]. Genuine Products Inc. requires a new machine. Two companies have submitted bids, and you have been assigned the task of choosing one of the machines. Cash flow analysis indicates the following:

Machine A Machine B

Year Cash Flow Cash Flow

0 -$2,000 -$2,000

1 0 832

2 0 832

3 0 832

4 3,877 832

What is the internal rate of return for each machine?

a. IRR_A = 16%; IRR_B = 20%

b. IRR_A = 24%; IRR_B = 20%

c. IRR_A = 18%; IRR_B = 16%

d. IRR_A = 18%; IRR_B = 24%

e. IRR_A = 24%; IRR_B = 26%

[xv]. Whitney Crane Inc. has the following independent investment opportunities for the coming year:

Annual Life

Project Cost Cash Inflows (Years) IRR

A $10,000 $11,800 1

B 5,000 3,075 2 15

C 12,000 5,696 3

D 3,000 1,009 4 13

The IRRs for Projects A and C, respectively, are:

a. 16% and 14%

b. 18% and 10%

c. 18% and 20%

d. 18% and 13%

e. 16% and 13%

[xvi]. A project has the following net cash flows:

Project

Year Cash Flow

0 -$ X

1 150

2 200

3 250

4 400

5 100

At the project’s WACC of 10 percent, the project has an NPV of $124.78. What is the project’s internal rate of return?

a. 10.00%

b. 12.62%

c. 13.49%

d. 15.62%

e. 16.38%

[xvii]. A company is analyzing two mutually exclusive projects, S and L, whose cash flows are shown below:

Years 0 1 2 3 4

S -1,100 900 350 50 10

L -1,100 0 300 500 850

The company’s cost of capital is 12 percent, and it can get an unlimited amount of capital at that cost. What is the regular IRR (not MIRR) of the better project? (Hint: Note that the better project may or may not be the one with the higher IRR.)

a. 13.09%

b. 12.00%

c. 17.46%

d. 13.88%

e. 12.53%

[xviii]. Your company is planning to open a new gold mine that will cost $3 million to build, with the expenditure occurring at the end of the year three years from today. The mine will bring year-end after-tax cash inflows of $2 million at the end of the two succeeding years, and then it will cost $0.5 million to close down the mine at the end of the third year of operation. What is this project’s IRR?

a. 14.36%

b. 10.17%

c. 17.42%

d. 12.70%

e. 21.53%

[xix]. As the capital budgeting director for Chapel Hill Coffins Company, you are evaluating construction of a new plant. The plant has a net cost of $5 million in Year 0 (today), and it will provide net cash inflows of $1 million at the end of Year 1, $1.5 million at the end of Year 2, and $2 million at the end of Years 3 through 5. Within what range is the plant’s IRR?

a. 14.33%

b. 15.64%

c. 16.50%

d. 17.01%

e. 18.37%

Answer: c

[xx]. Hadl.com is considering the following two projects:

Project 1 Project 2

Year Cash Flow Cash Flow

0 -$100 ?

1 30 40

2 50 80

3 40 60

4 50 60

The two projects have the same payback. What is Project 2’s internal rate of return (IRR)?

a. 44.27%

b. 23.40%

c. 20.85%

d. 14.73%

e. 17.64%

[xxi]. Alyeska Salmon Inc., a large salmon canning firm operating out of Valdez, Alaska, has a new automated production line project it is considering. The project has a cost of $275,000 and is expected to provide after-tax annual cash flows of $73,306 for eight years. The firm’s management is uncomfortable with the IRR reinvestment assumption and prefers the modified IRR approach. You have calculated a cost of capital for the firm of 12 percent. What is the project’s MIRR?

a. 15.0%

b. 14.0%

c. 12.0%

d. 16.0%

e. 17.0%

[xxii]. Martin Manufacturers is considering a five-year investment that costs $100,000. The investment will produce cash flows of $25,000 each year for the first two years (t = 1 and t = 2), $50,000 a year for each of the remaining three years (t = 3, t = 4, and t = 5). The company has a weighted average cost of capital of 12 percent. What is the MIRR of the investment?

a. 12.10%

b. 14.33%

c. 16.00%

d. 18.25%

e. 19.45%

[xxiii]. Below are the returns of Nulook Cosmetics and “the market” over a three-year period:

Year Nulook Market

1 9% 6%

2 15 10

3 36 24

Nulook finances internally using only retained earnings, and it uses the Capital Asset Pricing Model with an historical beta to determine its cost of equity. Currently, the risk-free rate is 7 percent, and the estimated market risk premium is 6 percent. Nulook is evaluating a project that has a cost today of $2,028 and will provide estimated cash inflows of $1,000 at the end of the next 3 years. What is this project’s MIRR?

a. 12.4%

b. 16.0%

c. 17.5%

d. 20.0%

e. 22.9%

[xxiv]. Belanger Construction is considering the following project. The project has an up-front cost and will also generate the following subsequent cash flows:

Project

Year Cash Flow

0 ?

1 $400

2 500

3 200

The project’s payback is 1.5 years, and it has a weighted average cost of capital of 10 percent. What is the project’s modified internal rate of return (MIRR)?

a. 10.00%

b. 19.65%

c. 21.54%

d. 23.82%

e. 14.75%

[xxv]. Tyrell Corporation is considering a project with the following cash flows (in millions of dollars):

Project

Year Cash Flow

0 ?

1 $1.0

2 1.5

3 2.0

4 2.5

The project has a regular payback period of exactly two years. The project’s cost of capital is 12 percent. What is the project’s modified internal rate of return (MIRR)?

a. 12.50%

b. 28.54%

c. 15.57%

d. 33.86%

e. 38.12%

[xxvi]. Jones Company’s new truck has a cost of $20,000, and it will produce end-of-year net cash inflows of $7,000 per year for 5 years. The cost of capital for an average-risk project like the truck is 8 percent. What is the sum of the project’s IRR and its MIRR?

a. 15.48%

b. 18.75%

c. 26.11%

d. 34.23%

e. 37.59%

[xxvii]. Two projects being considered by a firm are mutually exclusive and have the following projected cash flows:

Project A Project B

Year Cash Flow Cash Flow

0 -$100,000 -$100,000

1 39,500 0

2 39,500 0

3 39,500 133,000

Based only on the information given, which of the two projects would be preferred, and why?

a. Project A, because it has a shorter payback period.

b. Project B, because it has a higher IRR.

c. Indifferent, because the projects have equal IRRs.

d. Include both in the capital budget, since the sum of the cash inflows exceeds the initial investment in both cases.

e. Choose neither, since their NPVs are negative.

[xxviii]. Scott Corporation’s new project calls for an investment of $10,000. It has an estimated life of 10 years and an IRR of 15 percent. If cash flows are evenly distributed and the tax rate is 40 percent, what is the annual before-tax cash flow each year? (Assume depreciation is a negligible amount.)

a. $1,993

b. $3,321

c. $1,500

d. $4,983

e. $5,019

[xxix]. McCarver Inc. is considering the following mutually exclusive projects:

Project A Project B

Year Cash Flow Cash Flow

0 -$5,000 -$5,000

1 200 3,000

2 800 3,000

3 3,000 800

4 5,000 200

At what cost of capital will the net present value (NPV) of the two projects be the same?

a. 15.68%

b. 16.15%

c. 16.25%

d. 17.72%

e. 17.80%

[xxx]. Martin Fillmore is a big football star who has been offered contracts by two different teams. The payments (in millions of dollars) he receives under the two contracts are listed below:

Team A Team B

Year Cash Flow Cash Flow

0 $8.0 $2.5

1 4.0 4.0

2 4.0 4.0

3 4.0 8.0

4 4.0 8.0

Fillmore is committed to accepting the contract that provides him with the highest net present value (NPV). At what discount rate would he be indifferent between the two contracts?

a. 10.85%

b. 11.35%

c. 16.49%

d. 19.67%

e. 21.03%

[xxxi]. Shelby Inc. is considering two projects that have the following cash flows:

Project 1 Project 2

Year Cash Flow Cash Flow

0 -$2,000 -$1,900

1 500 1,100

2 700 900

3 800 800

4 1,000 600

5 1,100 400

At what weighted average cost of capital would the two projects have the same net present value (NPV)?

a. 4.73%

b. 5.85%

c. 5.98%

d. 6.40%

e. 6.70%

[xxxii]. Jackson Jets is considering two mutually exclusive projects. The projects have the following cash flows:

Project A Project B

Year Cash Flow Cash Flow

0 -$10,000 -$8,000

1 1,000 7,000

2 2,000 1,000

3 6,000 1,000

4 6,000 1,000

At what weighted average cost of capital do the two projects have the same net present value (NPV)?

a. 11.20%

b. 12.26%

c. 12.84%

d. 13.03%

e. 14.15%

[xxxiii]. Midway Motors is considering two mutually exclusive projects, Project A and Project B. The projects are of equal risk and have the following cash flows:

Project A Project B

Year Cash Flow Cash Flow

0 -$100,000 -$100,000

1 40,000 30,000

2 25,000 15,000

3 70,000 80,000

4 40,000 55,000

At what WACC would the two projects have the same net present value (NPV)?

a. 10.33%

b. 13.95%

c. 11.21%

d. 25.11%

e. 14.49%

[xxxiv]. Robinson Robotics is considering two mutually exclusive projects, Project A and Project B. The projects have the following cash flows:

Project A Project B

Year Cash Flow Cash Flow

0 -$200 -$300

1 20 90

2 30 70

3 40 60

4 50 50

5 60 40

At what weighted average cost of capital would the two projects have the same net present value (NPV)?

a. 12.69%

b. 8.45%

c. 10.32%

d. 9.32%

e. -47.96%

[xxxv]. Turner Airlines is considering two mutually exclusive projects, Project A and Project B. The projects have the following cash flows:

Project A Project B

Year Cash Flow Cash Flow

0 -$100,000 -$190,000

1 30,000 30,000

2 35,000 35,000

3 40,000 100,000

4 40,000 100,000

The two projects are equally risky. At what weighted average cost of capital would the two projects have the same net present value (NPV)?

a. 3.93%

b. 8.59%

c. 13.34%

d. 16.37%

e. 17.67%

[xxxvi]. Unitas Department Stores is considering the following mutually exclusive projects:

Project 1 Project 2

Year Cash Flow Cash Flow

0 -$215 million -$270 million

1 20 million 70 million

2 70 million 100 million

3 90 million 110 million

4 70 million 30 million

At what weighted average cost of capital would the two projects have the same net present value (NPV)?

a. 1.10%

b. 19.36%

c. 58.25%

d. 5.85%

e. 40.47%

[xxxvii]. Athey Airlines is considering two mutually exclusive projects, Project A and Project B. The projects have the following cash flows (in millions of dollars):

Project A Project B

Year Cash Flow Cash Flow

0 -$4.0 ?

1 2.0 $1.7

2 3.0 3.2

3 5.0 5.8

The crossover rate of the two projects’ NPV profiles is 9 percent. Consequently, when the WACC is 9 percent the projects have the same NPV. What is the cash flow for Project B at t = 0?

a. -$4.22

b. -$3.49

c. -$8.73

d. +$4.22

e. -$4.51

[xxxviii]. Two fellow financial analysts are evaluating a project with the following net cash flows:

Year Cash Flow

0 -$ 10,000

1 100,000

2 -100,000

One analyst says that the project has an IRR of between 12 and 13 percent. The other analyst calculates an IRR of just under 800 percent, but fears his calculator’s battery is low and may have caused an error. You agree to settle the dispute by analyzing the project cash flows. Which statement best describes the IRR for this project?

a. There is a single IRR of approximately 12.7 percent.

b. This project has no IRR, because the NPV profile does not cross the
X-axis.

c. There are multiple IRRs of approximately 12.7 percent and 787 percent.

d. This project has two imaginary IRRs.

e. There are an infinite number of IRRs between 12.5 percent and 790 percent that can define the IRR for this project.

[xxxix]. Returns on the market and Takeda Company’s stock during the last 3 years are shown below:

Year Market Takeda

1 -12% -14%

2 23 31

3 16 10

The risk-free rate is 7 percent, and the required return on the market is 12 percent. Takeda is considering a project whose market beta was found by adding 0.2 to the company’s overall corporate beta. Takeda finances only with equity, all of which comes from retained earnings. The project has a cost of $100 million, and it is expected to provide cash flows of $20 million per year at the end of Years 1 through 5 and then $30 million per year at the end of Years 6 through 10. What is the project’s NPV (in millions of dollars)?

a. $20.89

b. $22.55

c. $23.11

d. $25.76

e. $28.12

[xl]. Returns on the market and Company Y’s stock during the last 3 years are shown below:

Year Market Company Y

1 -24% -22%

2 10 13

3 22 36

The risk-free rate is 5 percent, and the required return on the market is 11 percent. You are considering a low-risk project whose market beta is 0.5 less than the company’s overall corporate beta. You finance only with equity, all of which comes from retained earnings. The project has a cost of $500 million, and it is expected to provide cash flows of $100 million per year at the end of Years 1 through 5 and then $50 million per year at the end of Years 6 through 10. What is the project’s NPV (in millions of dollars)?

a. $ 7.10

b. $ 9.26

c. $10.42

d. $12.10

e. $15.75