Question_TB10_12Dec_4th

[i]. As the director of capital budgeting for Raleigh/Durham Company, you are evaluating two mutually exclusive projects with the following net cash flows:

Project X Project Z

Year Cash Flow Cash Flow

0 -$100 -$100

1 50 10

2 40 30

3 30 40

4 10 60

Is there a crossover point in the relevant part of the NPV profile graph (the northeast, or upper right, quadrant)?

a. No.

b. Yes, at k» 7%.

c. Yes, at k» 9%.

d. Yes, at k» 11%.

e. Yes, at k» 13%.

[ii]. Your company is considering two mutually exclusive projects, X and Y, whose costs and cash flows are shown below:

Project X Project Y

Year Cash Flow Cash Flow

0 -$2,000 -$2,000

1 200 2,000

2 600 200

3 800 100

4 1,400 75

The projects are equally risky, and the firm’s cost of capital is 12 percent. You must make a recommendation, and you must base it on the modified IRR (MIRR). What is the MIRR of the better project?

a. 12.00%

b. 11.46%

c. 13.59%

d. 12.89%

e. 15.73%

[iii]. Florida Phosphate is considering a project that involves opening a new mine at a cost of $10,000,000 at t = 0. The project is expected to have operating cash flows of $5,000,000 at the end of each of the next
4 years. However, the facility will have to be repaired at a cost of $6,000,000 at the end of the second year. Thus, at the end of Year 2 there will be a $5,000,000 operating cash inflow and an outflow of
-$6,000,000 for repairs. The company’s weighted average cost of capital is 15 percent. What is the difference between the project’s MIRR and its regular IRR?

a. 0.51%

b. 9.65%

c. 11.22%

d. 12.55%

e. 13.78%

[iv]. Project C has the following net cash flows:

Project C

Year Cash Flow

0 -$500

1 200

2 -X

3 300

4 500

Note, that the cash flow, X, at t = 2 is an outflow (that is, X < 0). Project C has a 10 percent cost of capital and a 12 percent modified internal rate of return (MIRR). What is the project’s cash outflow at t = 2?

a. -$196.65

b. -$237.95

c. -$246.68

d. -$262.92

e. -$318.13

[v]. Diefenbaker Inc. is considering a project that has the following cash flows:

Project

Year Cash Flow

0 ?

1 $100,000

2 200,000

3 200,000

4 -100,000

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

a. 5.74%

b. 12.74%

c. 13.34%

d. 16.37%

e. 17.67%

[vi]. Mooradian Corporation estimates that its weighted average cost of capital is 11 percent. The company is considering two mutually exclusive projects whose after-tax cash flows are as follows:

Project S Project L

Year Cash Flow Cash Flow

0 -$3,000 -$9,000

1 2,500 -1,000

2 1,500 5,000

3 1,500 5,000

4 -500 5,000

What is the modified internal rate of return (MIRR) of the project with the highest NPV?

a. 11.89%

b. 13.66%

c. 16.01%

d. 18.25%

e. 20.12%

[vii]. A company is considering a project with the following cash flows:

Project

Year Cash Flow

0 -$100,000

1 50,000

2 50,000

3 50,000

4 -10,000

The project’s weighted average cost of capital is estimated to be 10 percent. What is the modified internal rate of return (MIRR)?

a. 11.25%

b. 11.56%

c. 13.28%

d. 14.25%

e. 20.34%

[viii]. Javier Corporation is considering a project with the following cash flows:

Project

Year Cash Flow

0 -$13,000

1 12,000

2 8,000

3 7,000

4 -1,500

The firm’s weighted average cost of capital is 11 percent. What is the project’s modified internal rate of return (MIRR)?

a. 16.82%

b. 21.68%

c. 23.78%

d. 24.90%

e. 25.93%

[ix]. Taylor Technologies has a target capital structure that consists of 40 percent debt and 60 percent equity. The equity will be financed with retained earnings. The company’s bonds have a yield to maturity of 10 percent. The company’s stock has a beta = 1.1. The risk-free rate is 6 percent, the market risk premium is 5 percent, and the tax rate is 30 percent. The company is considering a project with the following cash flows:

Project A

Year Cash Flow

0 -$50,000

1 35,000

2 43,000

3 60,000

4 -40,000

What is the project’s modified internal rate of return (MIRR)?

a. 6.76%

b. 9.26%

c. 10.78%

d. 16.14%

e. 20.52%

[x]. Conrad Corp. has an investment project with the following cash flows:

Project

Year Cash Flow

0 -$1,000

1 200

2 -300

3 900

4 -700

5 600

The company’s WACC is 12 percent. What is the project’s modified internal rate of return (MIRR)?

a. 2.63%

b. 3.20%

c. 3.95%

d. 5.68%

e. 6.83%

[xi]. Simmons Shoes is considering a project with the following cash flows:

Project

Year Cash Flow

0 -$700

1 400

2 -200

3 600

4 500

Simmons’ WACC is 10 percent. What is the project’s modified internal rate of return (MIRR)?

a. 17.10%

b. 18.26%

c. 25.28%

d. 28.93%

e. 29.52%

[xii]. Capitol City Transfer Company is considering building a new terminal in Salt Lake City. If the company goes ahead with the project, it must spend $1 million immediately (at t = 0) and another $1 million at the end of Year 1 (t = 1). It will then receive net cash flows of $0.5 million at the end of Years 2-5, and it expects to sell the property and net $1 million at the end of Year 6. All cash inflows and outflows are after taxes. The company’s weighted average cost of capital is 12 percent, and it uses the modified IRR criterion for capital budgeting decisions. What is the project’s modified IRR (MIRR)?

a. 11.9%

b. 12.0%

c. 11.4%

d. 11.5%

e. 11.7%

[xiii]. Houston Inc. is considering a project that involves building a new refrigerated warehouse that will cost $7,000,000 at t = 0 and is expected to have operating cash flows of $500,000 at the end of each of the next 20 years. However, repairs that will cost $1,000,000 must be incurred at the end of the 10th year. Thus, at the end of Year 10 there will be a $500,000 operating cash inflow and an outflow of -$1,000,000 for repairs. If Houston’s weighted average cost of capital is 12 percent, what is the project’s MIRR? (Hint: Think carefully about the MIRR equation and the treatment of cash outflows.)

a. 7.75%

b. 8.17%

c. 9.81%

d. 11.45%

e. 12.33%

[xiv]. Acheson Aluminum is considering a project with the following cash flows:

Year Cash Flow

0 -$200,000

1 125,000

2 140,000

3 -50,000

4 100,000

Acheson’s WACC is 10%. What is the project’s modified internal rate of return (MIRR)?

a. 17.95%

b. 16.38%

c. 14.90%

d. 15.23%

e. 12.86%

[xv]. Mississippi Motors is considering a project with the following cash flows:

Project

Year Cash Flow

0 -$150,000

1 -50,000

2 200,000

3 50,000

The project has a WACC of 9 percent. What is the project’s modified internal rate of return (MIRR)?

a. 7.72%

b. 29.72%

c. 11.62%

d. 12.11%

e. 11.02%

[xvi]. Walnut Industries is considering a project with the following cash flows (in millions of dollars):

Project

Year Cash Flow

0 -$300

1 -200

2 500

3 700

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

a. 26.9%

b. 15.3%

c. 33.9%

d. 49.4%

e. 37.4%

[xvii]. Kilmer Co. is considering the following project:

Project

Year Cash Flow

0 -$150

1 100

2 50

3 -50

4 150

The company’s weighted average cost of capital is 10 percent. What is the project’s modified internal rate of return (MIRR)?

a. 4.01%

b. 24.15%

c. 16.34%

d. 14.15%

e. 17.77%

[xviii]. Arrington Motors is considering a project with the following cash flows:

Time period Cash Flows

0 -$200

1 +120

2 -50

3 +700

The project has a 12 percent WACC. What is the project’s modified internal rate of return (MIRR)?

a. 68.47%

b. 51.49%

c. 48.58%

d. 37.22%

e. 52.49%

[xix]. Ditka Diners is considering a project with the following expected cash flows (in millions of dollars):

Project

Year Cash Flow

0 -$300

1 -100

2 70

3 125

4 700

The project’s WACC is 10 percent. What is the project’s modified internal rate of return (MIRR)?

a. 36.95%

b. 18.13%

c. 27.35%

d. 26.48%

e. 23.93%

[xx]. After getting her degree in marketing and working for 5 years for a large department store, Sally started her own specialty shop in a regional mall. Sally’s current lease calls for payments of $1,000 at the end of each month for the next 60 months. Now the landlord offers Sally a new 5-year lease that calls for zero rent for 6 months, then rental payments of $1,050 at the end of each month for the next 54 months. Sally’s cost of capital is 11 percent. By what absolute dollar amount would accepting the new lease change Sally’s theoretical net worth?

a. $2,810.09

b. $3,243.24

c. $3,803.06

d. $4,299.87

e. $4,681.76

Multiple part:

(The information below applies to the next two problems.)

Warrick Winery is considering two mutually exclusive projects, Project Red and Project White. The projects have the following cash flows:

Project Red Project White

Year Cash Flows Cash Flows

0 -$1,000 -$1,000

1 100 700

2 200 400

3 600 200

4 800 100

Assume that both projects have a 10 percent WACC.

[xxi]. What is the internal rate of return (IRR) of the project that has the highest NPV?

a. 14.30%

b. 21.83%

c. 18.24%

d. 10.00%

e. 21.96%

[xxii]. At what weighted average cost of capital would the two projects have the same net present value?

a. 10.00%

b. 0.00%

c. 20.04%

d. 14.30%

e. 24.96%

(The following information applies to the next five problems.)

Woodgate Inc. is considering a project that has the following after-tax operating cash flows (in millions of dollars):

Project

Year Cash Flow

0 -$300

1 125

2 75

3 200

4 100

Woodgate Inc.’s finance department has concluded that the project has a 10 percent cost of capital.

[xxiii]. What is the project’s payback period?

a. 2.00 years

b. 2.50 years

c. 2.65 years

d. 2.83 years

e. 3.00 years

[xxiv]. What is the project’s discounted payback period?

a. 2.00 years

b. 2.50 years

c. 2.65 years

d. 2.83 years

e. 3.00 years

[xxv]. What is the project’s internal rate of return (IRR)?

a. 10.00%

b. 16.83%

c. 19.12%

d. 23.42%

e. 26.32%

[xxvi]. What is the project’s net present value (NPV)?

a. $ 25.88 million

b. $ 40.91 million

c. $ 94.18 million

d. $137.56 million

e. $198.73 million

[xxvii]. What is the project’s modified internal rate of return (MIRR)?

a. 7.64%

b. 10.53%

c. 17.77%

d. 19.12%

e. 27.64%

(The following information applies to the following four problems.)

Project A has a 10 percent cost of capital and the following cash flows:

Project A

Year Cash Flow

0 -$300

1 100

2 150

3 200

4 50

[xxviii]. What is Project A’s net present value (NPV)?

a. $ 21.32

b. $ 66.26

c. $ 83.00

d. $ 99.29

e. $112.31

[xxix]. What is Project A’s internal rate of return (IRR)?

a. 13.44%

b. 16.16%

c. 18.92%

d. 24.79%

e. 26.54%

[xxx]. What is Project A’s modified internal rate of return (MIRR)?

a. 7.40%

b. 12.15%

c. 14.49%

d. 15.54%

e. 18.15%

[xxxi]. In addition to Project A, the firm has a chance to invest in Project B. Project B has the following cash flows:

Project B

Year Cash Flow

0 -$200

1 150

2 100

3 50

4 50

At what cost of capital would Project A and Project B have the same net present value (NPV)?

a. 11.19%

b. 12.23%

c. 12.63%

d. 13.03%

e. 13.27%

(The following information applies to the next two problems.)

Company A is considering a project with the following cash flows:

Project

Year Cash Flow

0 -$5,000

1 5,000

2 3,000

3 -1,000

The project has a cost of capital of 10 percent.

[xxxii]. What is the project’s net present value (NPV)?

a. $1,157

b. $1,273

c. $1,818

d. $2,000

e. $2,776

[xxxiii]. What is the project’s modified internal rate of return (MIRR)?

a. 16.6%

b. 17.0%

c. 17.6%

d. 18.0%

e. 18.6%

(The following information applies to the next two problems.)

Company B is considering a project with the following cash flows:

Project

Year Cash Flow

0 - X

1 175

2 175

3 300

[xxxiv]. Assume that the project has a regular payback period of 2 years and a cost of capital of 10 percent. What is the project’s net present value (NPV)?

a. $179.11

b. $204.11

c. $229.11

d. $254.11

e. $279.11

[xxxv]. Now instead of making an assumption about the payback period, instead assume that the project has an internal rate of return (IRR) of 15 percent. Given this assumption, what would be the project’s net present value (NPV) if the WACC equals 12 percent?

a. $ 0.00

b. $18.08

c. $27.54

d. $37.30

e. $47.36

(The following information applies to the next four problems.)

Bell Corporation 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 -500 -500

1 150 300

2 200 300

3 250 350

4 100 -300

Both projects have a 10 percent cost of capital.

[xxxvi]. What is Project A’s net present value (NPV)?

a. 30.12

b. 34.86

c. 46.13

d. 57.78

e. 62.01

[xxxvii]. What is Project A’s internal rate of return (IRR)?

a. 15.32%

b. 15.82%

c. 16.04%

d. 16.68%

e. 17.01%

[xxxviii]. What is Project B’s modified internal rate of return (MIRR)?

a. 12.05%

b. 12.95%

c. 13.37%

d. 14.01%

e. 14.88%

[xxxix]. At what discount rate would the two projects have the same net present value?

a. 4.50%

b. 5.72%

c. 6.36%

d. 7.15%

e. 8.83%