Question 1

Babcock Inc.is considering a project that has the following cash flow and WACC data.What is the project's NPV? $\begin{array}{cccc}
 \text { WACC } &10.00 \% \
 \text { Year: } & 0 & 1 & 2 & 3 \
\hline  \text {Cash flows: } &-\$ 950 & \$ 500 & \$ 400 & \$ 300
\end{array}$
A)$54.62
B)$57.49
C)$60.52
D)$63.54

Accepted Answer

The NPV (Net Present Value) is calculated using the formula: $NPV = \sum \frac{CF_t}{(1 + r)^t}$, where $CF_t$ is the cash flow at time t, and r is the discount rate (WACC in this case). Plugging in the values: $NPV = -950 + \frac{500}{(1 + 0.1)^1} + \frac{400}{(1 + 0.1)^2} + \frac{300}{(1 + 0.1)^3} = -950 + 454.55 + 330.58 + 225.39 = 60.52$.

Question 2

ZumBahlen Inc.is considering the following mutually exclusive projects:​​​ $\begin{array}{lrr}
\text { Year } & \begin{array}{r}
\text { Project A } \
\text { Cash Flow }
\end{array} & \begin{array}{r}
\text { Project B } \
\text { Cash Flow }
\end{array} \
\hline 0 & -\$ 5,000 & -\$ 5,000 \
1 & 200 & 3,000 \
2 & 800 & 3,000 \
3 & 3,000 & 800 \
4 & 5,000 & 200
\end{array}$ ​At what cost of capital will the NPV of the two projects be the same? (That is,what is the "crossover" rate?)
A)16.15%
B)16.74%
C)17.33%
D)17.80%

Accepted Answer

The crossover rate is the cost of capital at which the NPV of two projects is the same. To find the crossover rate, we can use the following formula:Crossover rate = (PV of Project A - PV of Project B) / (Initial investment of Project A - Initial investment of Project B)In this case, the initial investment of both projects is $5,000. The PV of Project A can be calculated as follows:PV of Project A = -5,000 + 200/(1+r) + 800/(1+r)^2 + 3,000/(1+r)^3 + 5,000/(1+r)^4The PV of Project B can be calculated as follows:PV of Project B = -5,000 + 3,000/(1+r) + 3,000/(1+r)^2 + 800/(1+r)^3 + 200/(1+r)^4Setting the PV of Project A equal to the PV of Project B and solving for r, we get:-5,000 + 200/(1+r) + 800/(1+r)^2 + 3,000/(1+r)^3 + 5,000/(1+r)^4 = -5,000 + 3,000/(1+r) + 3,000/(1+r)^2 + 800/(1+r)^3 + 200/(1+r)^4200/(1+r) - 3,000/(1+r) + 800/(1+r)^2 - 3,000/(1+r)^2 + 5,000/(1+r)^4 - 200/(1+r)^4 = 0200/(1+r) - 2,200/(1+r) + 500/(1+r)^2 + 4,800/(1+r)^4 = 0(200 - 2,200r + 500r^2 + 4,800r^4)/(1+r)^4 = 0200 - 2,200r + 500r^2 + 4,800r^4 = 0Using a financial calculator, we can solve for r and get the crossover rate of 16.15%.

Question 3

Adler Enterprises is considering a project that has the following cash flow and WACC data.What is the project's NPV? $\begin{array}{cccc}
 \text { WACC } &10.00 \% \
 \text { Year: } & 0 & 1 & 2 & 3 \
\hline  \text {Cash flows: } &-\$ 1,000 & \$ 450 & \$ 460 & \$ 470
\end{array}$
A)$142.37
B)$149.49
C)$156.97
D)$164.82

Accepted Answer

The correct answer is A because the NPV is $142.37. The NPV is calculated as the sum of the present values of the cash flows, discounted at the WACC. The present value of each cash flow is calculated as the cash flow divided by (1 + WACC)^year. The NPV is then calculated as the sum of the present values of the cash flows.

Question 4

Steve Hawke is a football star who has been offered contracts by two different teams.The payments (in millions of dollars) under the two contracts are shown below:​​​ $\begin{array}{lcc}
&\text { Team A}&\text { Team B}\
\text { Year } & \text { Cash Payment }& \text { Cash Payment } \
\hline & \$ 8.0 & \$ 2.5 \
1 & 4.0 & 4.0 \
2 & 4.0 & 4.0 \
3 & 4.0 & 8.0 \
4 & 4.0 & 8.0
\end{array}$ ​Steve plans to accept the contract that provides him with the highest NPV.At what discount rate would he be indifferent between the two contracts?
A)10.85%
B)11.35%
C)12.66%
D)13.98%

Accepted Answer

The answer of Steve Hawke is a football star who...

Question 5

Choi Computer Systems is considering a project that has the following cash flow data.What is the project's IRR? $\begin{array}{l}
\begin{array}{l}
\text { Year: } \
\text { Cash flows: }
\end{array}
\begin{array}{cccc}
0 & 1 & 2 & 3 \
\hline-\$ 1,000 & \$ 450 & \$ 470 & \$ 490
\end{array}
\end{array}$
A)13.89%
B)15.43%
C)17.15%
D)19.05%

Accepted Answer

The answer of Choi Computer Systems is considering a project...

Question 6

Which statement about a project's MIRR is correct? Assume that the project being considered has normal cash flows,with one outflow followed by a series of inflows.
A)A project's MIRR is always greater than its regular IRR.
B)A project's MIRR is always less than its regular IRR.
C)If a project's IRR is greater than its WACC, then the MIRR will be less than the IRR.
D)If a project's IRR is greater than its WACC, then the MIRR will be greater than the IRR.

Accepted Answer

MIRR is typically less than IRR when IRR is greater than WACC because MIRR assumes reinvestment at the WACC, which is usually lower than the IRR.

Question 7

Thompson Stores is considering a project that has the following cash flow data.What is the project's IRR?​​​ $\begin{array}{lccccccc}
\text { Year: } & 0 & 1 & 2 & 3 & 4 & 5 & \
\text { Cash } & -\$ 1,000 & & \$ 300 & \$ 295 & \$ 290 & \$ 285 & \$ 270 \
\text { flows: } & & & & & &
\end{array}$ ​​
A)11.16%
B)12.40%
C)13.78%
D)15.16%

Accepted Answer

To calculate the IRR, we need to find the rate at which the present value of cash inflows equals the initial investment of $1000. We can use trial and error or a financial calculator to find the IRR.

Using a financial calculator, we input the cash flows as follows:

CF0 = -1000 
CF1 = 300 
CF2 = 295 
CF3 = 290 
CF4 = 285 
CF5 = 270

Then, we compute the IRR which is 13.78%

Therefore, the best choice for the project's IRR is C)13.78%

Question 8

Van Auken Inc.is considering a project that has the following cash flows:The company's WACC is 10%.What are the project's payback,IRR,and NPV? 
$\begin{array}{ll}
 \underline {\text { Year } }& \underline {\text { Cash Flow } }\
0 & -\$ 1,000 \
1 & \$ 400 \
2 & \$ 300 \
3 & \$ 500 \
4 & \$ 400
\end{array}$
A)payback = 2.4, IRR = 10.00%, NPV = $600
B)payback = 2.4, IRR = 21.22%, NPV = $260
C)payback = 2.6, IRR = 21.22%, NPV = $300
D)payback = 2.6, IRR = 21.22%, NPV = $260

Accepted Answer

To calculate the payback period, we need to accumulate the cash flows until we have recovered the initial investment:

Year 0: -1000
Year 1: -1000 + 400 = -600
Year 2: -600 + 300 = -300
Year 3: -300 + 500 = 200
Year 4: 200 + 400 = 600

Therefore, the payback period is between Year 3 and Year 4, and we need to interpolate to find the exact payback period:

Payback period = 3 + (100 - 200) / 500 = 2.6 years

To calculate the IRR, we can use Excel or a financial calculator. The IRR is the discount rate that makes the NPV equal to zero. In this case, we get an IRR of approximately 21.22%.

To calculate the NPV, we use the formula:

NPV = -1000 + 400 / (1 + 0.1)^1 + 300 / (1 + 0.1)^2 + 500 / (1 + 0.1)^3 + 400 / (1 + 0.1)^4

NPV = $260

Since the NPV is positive, the project is expected to generate a return higher than the required rate of return (WACC), and therefore it is acceptable. Among the answer choices, the only one that matches the calculated values is D.

Question 9

Johnson Enterprises is considering a project that has the following cash flow and WACC data.What is the project's NPV? $\begin{array}{cccc}
 \text { WACC } &10.00 \% \
 \text { Year: } & 0 & 1 & 2 & 3&4 \
\hline  \text {Cash flows: } &-\$ 1,000 & \$ 350 & \$ 350 & \$ 350 & \$ 350
\end{array}$
A)$98.78
B)$103.98
C)$109.45
D)$114.93

Accepted Answer

The answer of Johnson Enterprises is considering a project that...

Question 10

Levin Company is considering a project that has the following cash flow data.What is the project's IRR? $\begin{array}{l}
\begin{array}{l}
\text { Year: } \
\text { Cash flows: }
\end{array}
\begin{array}{cccc}
0 & 1 & 2 & 3 & 4 \
\hline-\$ 1,000 & \$ 400 & \$ 400 & \$ 400 & \$ 400
\end{array}
\end{array}$
A)15.94%
B)17.71%
C)19.68%
D)21.86%

Accepted Answer

The answer of Levin Company is considering a project that...

Question 11

Wells Inc.is considering a project that has the following cash flow data.What is the project's payback? $\begin{array}{l}
\begin{array}{l}
\text { Year: } \
\text { Cash flows: }
\end{array}
\begin{array}{cccc}
0 & 1 & 2 & 3 \
\hline-\$ 1,000 & \$ 500 & \$ 500 & \$ 500
\end{array}
\end{array}$
A)1.62 years
B)1.80 years
C)2.00 years
D)2.20 years

Accepted Answer

The project's payback period is calculated by adding the cash flows year by year until the initial investment is recovered. In this case, the initial investment is $1,000. In Year 1, the project generates $500, and in Year 2, it generates another $500. By the end of Year 2, the total cash flow is $1,000, which equals the initial investment. Therefore, the payback period is 2.00 years.

Question 12

Humboldt Inc.is considering a project that has the following cash flow and WACC data.What is the project's NPV? $\begin{array}{cccc}
 \text { WACC } &9.00 \% \
 \text { Year: } & 0 & 1 & 2 & 3&4 &5\
\hline  \text {Cash flows: } &-\$ 1,000 & \$ 300 & \$ 300 & \$ 300 & \$ 300 & \$ 300
\end{array}$
A)$135.94
B)$143.09
C)$150.62
D)$166.90

Accepted Answer

The answer of Humboldt Inc.is considering a project that has...

Question 13

You are on the staff of Camden Inc.The CFO believes project acceptance should be based on the NPV,but Steve Camden,the president,insists that no project can be accepted unless its IRR exceeds the project's risk-adjusted WACC.Now you must make a recommendation on a project that has a cost of $15,000 and two cash flows: $110,000 at the end of Year 1 and -$100,000 at the end of Year 2.The president and the CFO both agree that the appropriate WACC for this project is 10%.At 10%,the NPV is $2,355.37,but you find two IRRs,one at 6.33% and one at 5.27%,and a MIRR of 11.32%.Which of the following statements best describes your optimal recommendation,i.e.,the analysis and recommendation that is best for the company and least likely to get you in trouble with either the CFO or the president?
A)You should recommend that the project be rejected because its NPV is negative and its IRR is less than the WACC.
B)You should recommend that the project be rejected because, although its NPV is positive, it has an IRR that is less than the WACC.
C)You should recommend that the project be accepted because (1) its NPV is positive and (2) although it has two IRRs, in this case it would be better to focus on the MIRR, which exceeds the WACC. You should explain this to the president and tell him that that the firm's value will increase if the project is accepted.
D)You should recommend that the project be rejected because (1) its NPV is positive and (2) it has two IRRs, one of which is less than the WACC, which indicates that the firm's value will decline if the project is accepted.

Accepted Answer

The project has a positive NPV of $2,355.37, which means that it is expected to add value to the company. Although it has two IRRs, the MIRR of 11.32% exceeds the risk-adjusted WACC of 10%, indicating that the project's cash flows will generate a return that exceeds the cost of capital, creating value for the company. Therefore, recommendation C is the best choice, which suggests that the project should be accepted, and the president should be explained how the firm's value will increase as a result of accepting the project.

Question 14

Tucker Corp.is considering a project that has the following cash flow data.What is the project's IRR? $\begin{array}{l}
\begin{array}{l}
\text { Year: } \
\text { Cash flows: }
\end{array}
\begin{array}{cccc}
0 & 1 & 2 & 3 \
\hline-\$ 1,000 & \$ 450 & \$ 450 & \$ 450
\end{array}
\end{array}$
A)15.82%
B)16.65%
C)17.48%
D)18.36%

Accepted Answer

To find the IRR, we need to find the discount rate at which the present value of future cash flows equals the initial investment of $1,000.
Using trial and error, we can find that at a discount rate of 16.65%, the present value of cash flows equals $1,000.
Thus, the project's IRR is 16.65%.
The best choice is B because it is the correct IRR for the project.

Question 15

Projects A and B are mutually exclusive and have normal cash flows.Project A has an IRR of 15% and Project B's IRR is 20%.The company's WACC is 12%,and at that rate Project A has the higher NPV.Which of the following statements is correct?
A)The crossover rate for the two projects must be less than 12%.
B)Assuming the timing pattern of the two projects' cash flows is the same, Project B probably has a higher cost (and larger scale).
C)Assuming the two projects have the same scale, Project B probably has a faster payback than Project A.
D)Since B has the higher IRR, then it must also have the higher NPV if the crossover rate is less than the WACC of 12%.

Accepted Answer

Project B, with a higher IRR, likely has a faster payback period if both projects are of the same scale.

Question 16

Edmondson Electric Systems is considering a project that has the following cash flow and WACC data.What is the project's NPV? $\begin{array}{cccc}
 \text { WACC } &10.00 \% \
 \text { Year: } & 0 & 1 & 2 & 3 \
\hline  \text {Cash flows: } & -\$ 1,000 & \$ 500 & \$ 500 & \$ 500
\end{array}$
A)$243.43
B)$255.60
C)$268.38
D)$281.80

Accepted Answer

The correct answer is A. The project's NPV is $243.43. This can be calculated using the following formula:NPV = -Initial Investment + Sum of Present Value of Future Cash FlowsNPV = -$1,000 + ($500 / (1 + 0.10)^1) + ($500 / (1 + 0.10)^2) + ($500 / (1 + 0.10)^3)NPV = -$1,000 + $454.55 + $413.23 + $375.66NPV = $243.43

Question 17

Rentz Recreation Inc.is considering a project that has the following cash flow data.What is the project's IRR? $\begin{array}{l}
\begin{array}{l}
\text { Year: } \
\text { Cash flows: }
\end{array}
\begin{array}{cccc}
0 & 1 & 2 & 3 & 4 \
\hline-\$ 650 & \$ 250 & \$ 230 & \$ 210 & \$ 190
\end{array}
\end{array}$
A)14.04%
B)15.44%
C)16.99%
D)18.69%

Accepted Answer

IRR is the discount rate that makes the NPV of a project equal to zero. In this case, the IRR is 14.04%.

Question 18

Rappaport Enterprises is considering a project that has the following cash flow and WACC data.What is the project's NPV? $\begin{array}{cccc}
 \text { WACC } &10.00 \% \
 \text { Year: } & 0 & 1 & 2 & 3 & 4 \
\hline  \text {Cash flows: } &-\$ 1,000 & \$ 400 & \$ 405 & \$ 410 & \$ 415
\end{array}$
A)$211.29
B)$234.77
C)$260.85
D)$289.84

Accepted Answer

The answer of Rappaport Enterprises is considering a project that...

Question 19

Which statement about a project's MIRR is correct? Assume that the project being considered has normal cash flows,with one cash outflow at t = 0 followed by a series of positive cash flows.
A)A project's MIRR is always greater than its regular IRR.
B)A project's MIRR is always less than its regular IRR.
C)To find a project's MIRR, we compound cash inflows at the regular IRR and then find the discount rate that causes the PV of the terminal value to equal the initial cost.
D)To find a project's MIRR, the textbook procedure compounds cash inflows at the WACC and then finds the discount rate that causes the PV of the terminal value to equal the initial cost.

Accepted Answer

The Modified Internal Rate of Return (MIRR) is calculated by compounding the project's cash inflows at the project's cost of capital (often the Weighted Average Cost of Capital, WACC) to the end of the project and then finding the discount rate that equates this terminal value to the project's initial cost. This method addresses some of the reinvestment rate assumptions inherent in the traditional IRR calculation.

Question 20

Barry Company is considering a project that has the following cash flow and WACC data.What is the project's NPV? $\begin{array}{cccc}
 \text { WACC } &10.00 \% \
 \text { Year: } & 0 & 1 & 2 & 3 & 4 & 5 \
\hline  \text {Cash flows: } &-\$ 1,200 & \$ 400 & \$ 395 & \$ 390 & \$ 385 & \$ 380
\end{array}$
A)$253.81
B)$282.01
C)$310.21
D)$341.23

Accepted Answer

The Net Present Value (NPV) is calculated by discounting each of the project's cash flows back to its present value using the Weighted Average Cost of Capital (WACC) and then summing those present values. The formula for NPV is: $$NPV = \sum \frac{CF_t}{(1 + WACC)^t}$$ where $CF_t$ is the cash flow at time $t$, and $WACC$ is the Weighted Average Cost of Capital. Using the given WACC of 10% and the cash flows, the NPV calculation is as follows: $$NPV = -\$1,200 + \frac{\$400}{(1 + 0.10)^1} + \frac{\$395}{(1 + 0.10)^2} + \frac{\$390}{(1 + 0.10)^3} + \frac{\$385}{(1 + 0.10)^4} + \frac{\$380}{(1 + 0.10)^5}$$ $$NPV = -\$1,200 + \$363.64 + \$326.45 + \$292.12 + \$261.22 + \$233.58$$ $$NPV = \$282.01$$ Therefore, the project's NPV is $282.01.

Quiz 10: The Basics of Capital Budgeting: Evaluating Cash Flows

Babcock Inc.is considering a project that has the following cash flow and WACC data.What is the project's NPV? $\begin{array}{cccc} \text { WACC } &10.00 \% \\ \text { Year: } & 0 & 1 & 2 & 3 \\\hline \text {Cash flows: } &-\$ 950 & \$ 500 & \$ 400 & \$ 300\end{array}$

Adler Enterprises is considering a project that has the following cash flow and WACC data.What is the project's NPV? $\begin{array}{cccc} \text { WACC } &10.00 \% \\ \text { Year: } & 0 & 1 & 2 & 3 \\\hline \text {Cash flows: } &-\$ 1,000 & \$ 450 & \$ 460 & \$ 470\end{array}$

Choi Computer Systems is considering a project that has the following cash flow data.What is the project's IRR? $\begin{array}{l}\begin{array}{l}\text { Year: } \\\text { Cash flows: }\end{array}\begin{array}{cccc}0 & 1 & 2 & 3 \\\hline-\$ 1,000 & \$ 450 & \$ 470 & \$ 490\end{array}\end{array}$

Which statement about a project's MIRR is correct? Assume that the project being considered has normal cash flows,with one outflow followed by a series of inflows.

Thompson Stores is considering a project that has the following cash flow data.What is the project's IRR? $\begin{array}{lccccccc}\text { Year: } & 0 & 1 & 2 & 3 & 4 & 5 & \\\text { Cash } & -\$ 1,000 & & \$ 300 & \$ 295 & \$ 290 & \$ 285 & \$ 270 \\\text { flows: } & & & & & &\end{array}$

Johnson Enterprises is considering a project that has the following cash flow and WACC data.What is the project's NPV? $\begin{array}{cccc} \text { WACC } &10.00 \% \\ \text { Year: } & 0 & 1 & 2 & 3&4 \\\hline \text {Cash flows: } &-\$ 1,000 & \$ 350 & \$ 350 & \$ 350 & \$ 350\end{array}$

Levin Company is considering a project that has the following cash flow data.What is the project's IRR? $\begin{array}{l}\begin{array}{l}\text { Year: } \\\text { Cash flows: }\end{array}\begin{array}{cccc}0 & 1 & 2 & 3 & 4 \\\hline-\$ 1,000 & \$ 400 & \$ 400 & \$ 400 & \$ 400\end{array}\end{array}$

Wells Inc.is considering a project that has the following cash flow data.What is the project's payback? $\begin{array}{l}\begin{array}{l}\text { Year: } \\\text { Cash flows: }\end{array}\begin{array}{cccc}0 & 1 & 2 & 3 \\\hline-\$ 1,000 & \$ 500 & \$ 500 & \$ 500\end{array}\end{array}$

Humboldt Inc.is considering a project that has the following cash flow and WACC data.What is the project's NPV? $\begin{array}{cccc} \text { WACC } &9.00 \% \\ \text { Year: } & 0 & 1 & 2 & 3&4 &5\\\hline \text {Cash flows: } &-\$ 1,000 & \$ 300 & \$ 300 & \$ 300 & \$ 300 & \$ 300\end{array}$

Tucker Corp.is considering a project that has the following cash flow data.What is the project's IRR? $\begin{array}{l}\begin{array}{l}\text { Year: } \\\text { Cash flows: }\end{array}\begin{array}{cccc}0 & 1 & 2 & 3 \\\hline-\$ 1,000 & \$ 450 & \$ 450 & \$ 450\end{array}\end{array}$

Projects A and B are mutually exclusive and have normal cash flows.Project A has an IRR of 15% and Project B's IRR is 20%.The company's WACC is 12%,and at that rate Project A has the higher NPV.Which of the following statements is correct?

Edmondson Electric Systems is considering a project that has the following cash flow and WACC data.What is the project's NPV? $\begin{array}{cccc} \text { WACC } &10.00 \% \\ \text { Year: } & 0 & 1 & 2 & 3 \\\hline \text {Cash flows: } & -\$ 1,000 & \$ 500 & \$ 500 & \$ 500\end{array}$

Rappaport Enterprises is considering a project that has the following cash flow and WACC data.What is the project's NPV? $\begin{array}{cccc} \text { WACC } &10.00 \% \\ \text { Year: } & 0 & 1 & 2 & 3 & 4 \\\hline \text {Cash flows: } &-\$ 1,000 & \$ 400 & \$ 405 & \$ 410 & \$ 415\end{array}$

Which statement about a project's MIRR is correct? Assume that the project being considered has normal cash flows,with one cash outflow at t = 0 followed by a series of positive cash flows.

Barry Company is considering a project that has the following cash flow and WACC data.What is the project's NPV? $\begin{array}{cccc} \text { WACC } &10.00 \% \\ \text { Year: } & 0 & 1 & 2 & 3 & 4 & 5 \\\hline \text {Cash flows: } &-\$ 1,200 & \$ 400 & \$ 395 & \$ 390 & \$ 385 & \$ 380\end{array}$