Question 1

A company is considering two mutually exclusive projects, A andB. Project A requires an initial investment of $100, followed by cash flows of $95, $20, and $5. Project B requires an initial investment of $100, followed by cash flows of $0, $20, and $130. What is the IRR of the project that is best for the company's shareholders? The firm's cost of capital is 10 percent.

Accepted Answer

The answer of A company is considering two mutually exclusive...

Question 2

A financial asset will pay you $10,000 at the end of 10 years if you pay premiums of $175 per year at the end of each year for 10 years. What is the IRR of this financial asset?

Accepted Answer

To find the IRR, we need to solve for the discount rate that makes the present value of the premiums equal to the future value of the asset. Using a financial calculator, we find that the IRR is 35.93 percent.

Question 3

The least-used capital budgeting technique in industry is:

Accepted Answer

MIRR (Modified Internal Rate of Return) is the least commonly used capital budgeting technique in industry. This may be because MIRR is a more complex and time-consuming calculation than other techniques, and its results may not always be easy to interpret. However, MIRR can be more accurate than other methods in certain situations, such as where cash flows are reinvested at a different rate than the project's initial cost of capital. Therefore, while MIRR may not be the most popular technique, it can still be useful in certain circumstances.

Question 4

We accept projects with a positive NPV because it means that:

Accepted Answer

The answer of We accept projects with a positive NPV...

Question 5

A disadvantage of the payback statistic is that:

Accepted Answer

All three options listed are disadvantages of the payback statistic. Payback does not account for the time value of money, which means that a dollar received in the future is less valuable than a dollar received today due to inflation and the potential for earning interest. Payback also does not incorporate the project's risk, as it only focuses on the time it takes to recoup the initial investment. Finally, payback ignores any cash flows that occur beyond the payback period, which can lead to an incomplete analysis of the project's overall profitability.

Question 6

Projects A and B are mutually exclusive. Project A costs $20,000 and is expected to generate cash inflows of $7,500 for 4 years. Project B costs $10,000 and is expected to generate a single cash flow in year 4 of $20,000. The cost of capital is 12%. Which project would you accept and why?

Accepted Answer

To determine the best choice, we need to calculate the NPV (Net Present Value) of each project.

For project A: 
NPV = - $20,000 + [$7,500 / (1 + 0.12)^1] + [$7,500 / (1 + 0.12)^2] + [$7,500 / (1 + 0.12)^3] + [$7,500 / (1 + 0.12)^4] 
NPV = -$1,276.16

For project B: 
NPV = -$10,000 + [$20,000 / (1 + 0.12)^4] 
NPV = $8,070.21

Since project B has a positive NPV, it would technically be an acceptable investment. However, project A has a higher NPV and should be chosen over project B.

Question 7

A financial asset will pay you $50,000 at the end of 20 years if you pay premiums of $975 per year at the end of each year for 20 years. What is the IRR of this financial asset?

Accepted Answer

The answer of A financial asset will pay you $50,000...

Question 8

The MIRR statistic is different from the IRR statistic in that:

Accepted Answer

The MIRR assumes that the cash inflows can be reinvested at the cost of capital, while the IRR assumes that cash inflows are reinvested at the IRR itself. This difference can lead to different results when comparing two projects, especially if the IRRs are different. Additionally, the MIRR uses weighted-average dollars, but this is not the main difference between the two statistics. Lastly, while the MIRR does use input from the NPV, this is not the main reason for its difference from the IRR.

Question 9

A project costs $101,000 today and is expected to generate cash flows of $31,000 per year for the next 15 years. At what rate is the NPV equal to zero?

Accepted Answer

The answer of A project costs $101,000 today and is...

Question 10

A company is considering two mutually exclusive projects, A andB. Project A requires an initial investment of $200, followed by cash flows of $185, $40, and $15. Project B requires an initial investment of $200, followed by cash flows of $0, $50, and $230. What is the IRR of the project that is best for the company's shareholders? The firm's cost of capital is 10 percent.

Accepted Answer

The answer of A company is considering two mutually exclusive...

Question 11

Projects A and B are mutually exclusive. Project A costs $10,000 and is expected to generate cash inflows of $4,000 for four years. Project B costs $10,000 and is expected to generate a single cash flow in year 4 of $20,000. The cost of capital is 12 percent. Which project would you accept and why?

Accepted Answer

The answer of Projects A and B are mutually exclusive....

Question 12

A project costs $91,000 today and is expected to generate cash flows of $11,000 per year for the next 20 years. The firm has a cost of capital of 8 percent. Should this project be accepted, and why?

Accepted Answer

The answer of A project costs $91,000 today and is...

Quiz 13: Weighing Net Present Value and Other Capital Budgeting Criteria