Question 1

Two projects being considered are mutually exclusive and have the following projected cash flows: $\begin{array}{lll}
\underline{\text { Year} } & \underline{\text { Project A}}& \underline{\text { Project B }}\
0 & -\$ 50,000 & -\$ 50,000 \
1 & 15,990 & 0 \
2 & 15,990 & 0 \
3 & 15,990 & 0 \
4 & 15,990 & 0 \
5 & 15,990 & 100.560
\end{array}$
 At what rate (approximately) do the NPV profiles of Projects A and B cross?

Accepted Answer

The answer of Two projects being considered are mutually exclusive...

Question 2

An insurance firm agrees to pay you $3,310 at the end of 20 years if you pay premiums of $100 per year at the end of each year of the 20 years.Find the internal rate of return to the nearest whole percentage point.

Accepted Answer

The answer of An insurance firm agrees to pay you...

Question 3

Two projects being considered are mutually exclusive and have the following cash flows: $\begin{array}{lll}
\underline{\text { Year }} & \underline{\text { Project A}} &\underline{\text { Project  B}}\
0 & -\$ 50,000 & -\$ 50,000 \
1 & 15,625 & 0 \
2 & 15,625 & 0 \
3 & 15,625 & 0 \
4 & 15,625 & 0 \
5 & 15,625 & 99,500
\end{array}$ If the required rate of return on these projects is 10 percent, which would be chosen and why?

Accepted Answer

Project B has a higher NPV when discounted at 10% due to the large cash inflow in year 5, despite having no cash inflows in the earlier years.

Question 4

Project A has a cost of $1,000, and it will produce end-of-year net cash inflows of $500 per year for 3 years.The project's required rate of return is 10 percent.What is the difference between the project's IRR and its MIRR?

Accepted Answer

First, let's find the IRR of the project using trial and error or a financial calculator:

Year 0: -$1,000 (initial investment)
Year 1: $500
Year 2: $500
Year 3: $500

IRR ≈ 12.25%

Next, let's find the MIRR of the project using the following steps:

1. Calculate the future value (FV) of all cash inflows at the required rate of return (r=10%):

FV = $500 x ((1+10%)^3 - 1)/10% = $1,732.05

2. Calculate the terminal value (TV) of all cash outflows (the initial investment) at the reinvestment rate (r=10%):

TV = -$1,000 x (1+10%)^3 = -$1,331.00

3. Find the MIRR by solving for the discount rate (d) that equates the present value of TV with the present value of FV:

TV = -$1,000; FV = $1,732.05
PV(TV) = -$1,000 / (1+d)^3
PV(FV) = $1,732.05 / (1+d)^3

Solving for d gives MIRR ≈ 7.16%

The difference between the IRR and MIRR is:

IRR - MIRR = 12.25% - 7.16% = 5.09%

Therefore, the best answer is C.

Question 5

Which of the following is most correct? The modified IRR (MIRR) method:

Accepted Answer

The MIRR method overcomes the problem of multiple rates of return and compounds cash flows at the required rate of return, addressing some limitations of the regular IRR method.

Question 6

Which of the following statements is correct?

Accepted Answer

The cross-over rate is found by calculating the IRR of the differences in the cash flows of two projects.

Question 7

Below are the returns of Nulook Cosmetics and the "market" over a three-year period: $$\begin{array} { l c r } 
\underline{\text { Year } }& \underline{\text { Nulook }} &\underline{ \text { Marke} } \
1 & 8 \% & 6 \% \
2 &9\% & 9 \% \
3 &32 \%&22\%
\end{array}$$ $\begin{array}{lll}
\underline{\text { Year }} &\underline{\text { Nulook }}& \underline{\text { Market }}\
1&8\%&6\%\
2&9 \% & 9 \%
\end{array}$
 Nulook finances internally using only retained earnings, and it uses the Capital Asset Pricing Model with a historical beta to determine its required rate of return.Currently, the risk-free rate is 7 percent, and the estimated market risk premium is 6 percent.Nulook is evaluating a project which 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?

Accepted Answer

The answer of Below are the returns of Nulook Cosmetics...

Question 8

The Seattle Corporation has been presented with an investment opportunity which 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 required rate of return is 10 percent.What is the NPV for this investment?

Accepted Answer

The answer of The Seattle Corporation has been presented with...

Question 9

In comparing two mutually exclusive projects of equal size and equal life, which of the following statements is most correct?

Accepted Answer

Both statements a and c are correct. The reason for this is that NPV and IRR use different discount rates to calculate project profitability. Additionally, while IRR measures the annualized return on investment, MIRR takes into account the reinvestment rate of cash flows. Therefore, the project with the higher NPV may have a lower IRR and the project with the higher IRR may have a lower MIRR.

Question 10

The capital budgeting director of Sparrow Corporation is evaluating a project which costs $200,000, is expected to last for 10 years and produce after-tax cash flows, including depreciation, of $44,503 per year.If the firm's required rate of return is 14 percent and its tax rate is 40 percent, what is the project's IRR?

Accepted Answer

To find the project's internal rate of return (IRR), we need to solve for the discount rate that makes the present value of the project's cash inflows equal to its initial cost. Using a financial calculator, we can find that the present value of the project's cash inflows is $406,811. Therefore, we need to solve the following equation for i:

$200,000 = $44,503 / (1 + i) + $44,503 / (1 + i)^2 + ... + $44,503 / (1 + i)^10

Solving for i, we find that the project's IRR is approximately 18%. Therefore, the best choice is C) 18%, which is the project's IRR.

Question 11

Two fellow financial analysts are evaluating a project with the following net cash flows: $$\begin{array} { l l } 
\text { Year } & \text { Cash Flow } \
0 & \$ - 10,000 \
1 & 100,000 \
2 & - 100,000
\end{array}$$ One analyst says that the project has an IRR of between 12 and 13%.The other analyst calculates an IRR of just under 800%, 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?

Accepted Answer

The project has multiple IRRs due to the change in sign of cash flows, resulting in IRRs of approximately 12.7% and 787%.

Question 12

Which of the following statements is correct?

Accepted Answer

The answer of Which of the following statements is correct?
...

Question 13

Which of the following statements is correct?

Accepted Answer

The regular IRR method can result in multiple rates of return when there are non-conventional cash flows, whereas the modified IRR (MIRR) method resolves this issue by assuming reinvestment at the project's cost of capital.

Question 14

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

Accepted Answer

The initial investment is $100,000 + $500,000 = $600,000.
The annual incremental cash flow starts at the end of the first year, so the payback period will be longer than 1 year.
To calculate the payback period, we need to find out in which year the cumulative cash flow equals the initial investment of $600,000.
Year 1: No incremental cash flow. Cumulative cash flow = -$600,000
Year 2: Incremental cash flow = $100,000. Cumulative cash flow = -$500,000
Year 3: Incremental cash flow = $110,000. Cumulative cash flow = -$390,000
Year 4: Incremental cash flow = $121,000. Cumulative cash flow = -$269,000
Year 5: Incremental cash flow = $133,100. Cumulative cash flow = -$135,900
Year 6: Incremental cash flow = $146,410. Cumulative cash flow = $10,510
The cumulative cash flow becomes positive in the sixth year, so the payback period is between 5 and 6 years. To estimate the payback period, we can use linear interpolation:
Payback period = Year 5 + (Cumulative cash flow at the end of Year 5 / Incremental cash flow in Year 6) = 5 + ($135,900 / $146,410) = 5.93 years.
Therefore, the best choice is C, 6 years.

Question 15

Project X has a cost of $30,000 at t = 0, and it is expected to produce a uniform cash flow stream for 7 years, i.e., the CF's are the same in Years 1 through 7, and it has a regular IRR of 14 percent.The required rate of return for the project is 12 percent.What is the project's modified IRR (MIRR)?

Accepted Answer

The answer of Project X has a cost of $30,000...

Question 16

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?

Accepted Answer

To calculate the present value of the investment, we can use the formula:

PV = CF1 / (1+r)^1 + CF2 / (1+r)^2 + ... + CFn / (1+r)^n

where PV is the present value, CF is the cash flow for each period, r is the required rate of return, and n is the total number of periods.

Using this formula, we can calculate the present value of the investment as:

PV = 5000 / (1+0.14)^1 + 5000 / (1+0.14)^2 + 5000 / (1+0.14)^3 + 5000 / (1+0.14)^4 + 5000 / (1+0.14)^5 + 3000 / (1+0.14)^6 + 3000 / (1+0.14)^7 + 3000 / (1+0.14)^8 + 2000 / (1+0.14)^9 + 2000 / (1+0.14)^10

PV = $21,937.26

Therefore, you should be willing to pay $21,937.26 for this investment. The correct answer is (B).

Question 17

The modified IRR (MIRR) is normally

Accepted Answer

The MIRR is less than the regular IRR when IRR > r because it assumes reinvestment at the project's cost of capital rather than the IRR. It is equal to the regular IRR when IRR = r because the reinvestment rate and the IRR are the same.

Question 18

Two projects being considered by a firm are mutually exclusive and have the following projected cash flows: $\begin{array}{lll}
\underline{\text { Year }} &\underline{ \text { Project A }}&\underline{ \text { Project B }}\
0 & (\$ 100,00) & (\$ 100,000 \
1 & 39,500 & 0 \
2 & 39,500 & 0 \
3 & 39,500 & 133,000
\end{array}$ Based only on the information given, which of the two projects would be preferred, and why?

Accepted Answer

Project B has a higher IRR, which means it is expected to generate a higher return on investment.

Question 19

Which of the following statements is correct?

Accepted Answer

The answer of Which of the following statements is correct?
...

Question 20

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 required rate of return for the firm of 12 percent.What is the project's MIRR?

Accepted Answer

RATIONALE Numerical Solution: 3.27869^1/8 = 1 + MIRR MIRR = 16%. Financial calculator solution: TV Inputs: N = 8; I = 12; PMT = 73,306. Output: FV = -901,641.31. MIRR Inputs: N = 8; PV = -275,000; FV = 901,641.31. Output: I = 16.0%. Alternate method Inputs: = 0; = 73,306; Nj = 8; I = 12. Output: NFV = $901,641.31. Inputs: = -275,000; = 0; Nj = 7; = 901,641.31. Output: IRR = 16.0% = MIRR. .

Quiz 9: Capital Budgeting Techniques

An insurance firm agrees to pay you $3,310 at the end of 20 years if you pay premiums of $100 per year at the end of each year of the 20 years.Find the internal rate of return to the nearest whole percentage point.

Project A has a cost of $1,000, and it will produce end-of-year net cash inflows of $500 per year for 3 years.The project's required rate of return is 10 percent.What is the difference between the project's IRR and its MIRR?

Which of the following is most correct? The modified IRR (MIRR) method:

Which of the following statements is correct?

In comparing two mutually exclusive projects of equal size and equal life, which of the following statements is most correct?

Which of the following statements is correct?

Which of the following statements is correct?

The modified IRR (MIRR) is normally

Which of the following statements is correct?