Question 1

International Transport Company is considering building a new facility in Seattle.If the company goes ahead with the project,it will spend $2 million immediately (at t = 0)and another $2 million at the end of Year 1(t = 1).It will then receive net cash flows of $1 million at the end of Years 2-5,and it expects to sell the property for $2 million at the end of Year 6.The company's required rate of return is 12 percent,and it uses the modified IRR criterion for capital budgeting decisions.Which of the following statements is most correct?

Accepted Answer

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Question 2

Los Angeles Lumber Company (LALC)is considering a project with a cost of $1,000 at t = 0 and inflows of $300 at the end of Years 1-5.LALC's cost of capital is 10 percent.What is the project's modified IRR (MIRR)?

Accepted Answer

To calculate MIRR, we first need to find the terminal value of the project's cash inflows at the end of Year 5, discounted back to t = 0 using LALC's cost of capital of 10%:
TV = $300 / (0.1 - 0.05) * (1 + 0.05)^5 = $2,060.69
Next, we need to find the present value of all outflows (the initial investment) and the future value of all inflows (the terminal value) at an assumed reinvestment rate. Let's assume a reinvestment rate of 8%, which is less than the cost of capital, to make the project conservative. The PV of outflows would simply be the initial investment of $1,000. The FV of inflows would be:
FV = $300 * ((1 + 0.08)^4) * (1 + 0.08) = $1,225.79
Now we can use the formula for MIRR:
MIRR = ((FV n=5 (INFLOWS, 8%) / PV n=0 (OUTFLOWS, 10%))^(1/5)) - 1
MIRR = ((2,060.69 / 1,000)^(1/5)) * ((1,225.79 / 1,000)^(1/5)) - 1
MIRR = 12.9%
Therefore, the best choice is option B.

Question 3

Given the following net cash flows,determine the IRR of the project:

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Question 4

O'Donnell Inc.has a required rate of return of 11.5 percent.The company has a project with the following cash flows:  What is the project's modified internal rate of return (MIRR)?

Accepted Answer

To calculate the MIRR, we use the initial outlay and terminal value of the cash flows at the end of the project. The terminal value is found by compounding the cash inflows at the cost of capital and then discounting it back to the present value. Using the formula, we get MIRR = [(FV of positive cash flows / PV of negative cash flows)^(1/n)] - 1 = [(185,000 / -105,000)^(1/4)] - 1 = 32.90%. Therefore, the best choice is B.

Question 5

An investment project has an initial cost,and then generates inflows of $50 a year for the next five years.The project has a payback period of 3.6 years.What is the project's internal rate of return?

Accepted Answer

To solve for the IRR, we need to find the discount rate that makes the net present value (NPV) of the project equal to zero. We can use trial and error or a financial calculator to solve for the IRR. Using trial and error, we find that a discount rate of 12.05% makes the NPV approximately equal to zero. Therefore, the project's internal rate of return is 12.05%.

Question 6

A company is analyzing two mutually exclusive projects,S and L,whose cash flows are shown below:  The company's required rate of return is 12 percent.What is the IRR of the better project? (Hint: Note that the better project may or may not be the one with the higher IRR.)

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

Question 7

Your company is considering two mutually exclusive projects,X and Y,whose costs and cash flows are shown below:  The projects are equally risky,and the firm's required rate of return is 12 percent.You must make a recommendation,and you must base it on the modified IRR.What is the MIRR of the better project?

Accepted Answer

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Question 8

Houston Inc.is considering a project which involves building a new refrigerated warehouse which will cost $7,000,000 at t = 0 and which is expected to have operating cash flows of $500,000 at the end of each of the next 20 years.However,repairs which 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 required rate of return is 12 percent,what is the project's MIRR? (Hint: Think carefully about the MIRR equation and the treatment of cash outflows.)

Accepted Answer

The answer of Houston Inc.is considering a project which involves...

Question 9

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 required rate of return is 12 percent,and it uses the modified IRR criterion for capital budgeting decisions.What is the project's modified IRR (MIRR)?

Accepted Answer

The answer of Capitol City Transfer Company is considering building...

Question 10

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 which 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 required rate of return is 11 percent.By what absolute dollar amount would accepting the new lease change Sally's theoretical net worth? (Hint: The required rate of return per month is 11%/12 = 0.9166667%.)

Accepted Answer

The answer of After getting her degree in marketing and...

Question 11

Your company is choosing between following non-repeatable,equally risky,mutually exclusive projects with the cash flows shown below.Your required rate of return is 10 percent.How much value will your firm sacrifice if it selects the project with the higher IRR?

Accepted Answer

To determine the value sacrificed by selecting the project with the higher internal rate of return (IRR), we need to calculate the net present value (NPV) of each project using the required rate of return of 10%.

Project A: 
NPV = -500 + (100/1.1) + (200/1.1^2) + (300/1.1^3) + (400/1.1^4) = $235.68

Project B: 
NPV = -700 + (500/1.1) = $236.38

The difference in NPV between the two projects is: 
$236.38 - $235.68 = $0.70

This means that if the firm selects project B with the higher IRR, it will sacrifice an NPV of $0.70 compared to selecting project A. Therefore, the best choice is to select project A.

Question 12

Mooradian Corporation estimates that its required rate of return is 11 percent.The company is considering two mutually exclusive projects whose after-tax cash flows are as follows:  What is the modified internal rate of return (MIRR)of the project with the highest NPV?

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The answer of Mooradian Corporation estimates that its required rate...

Question 13

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 through5.Within what range is the plant's IRR?

Accepted Answer

The answer of As the capital budgeting director for Chapel...

Question 14

Woodson Inc.has two possible projects,Project A and Project B,with the following cash flows:  At what required rate of return do the two projects have the same net present value (NPV)? (In other words,what is the "crossover rate" of the projects' NPV profiles?)

Accepted Answer

The answer of Woodson Inc.has two possible projects,Project A and...

Quiz 9: Capital Budgeting Techniques

Los Angeles Lumber Company (LALC) is considering a project with a cost of $1,000 at t = 0 and inflows of $300 at the end of Years 1-5.LALC's cost of capital is 10 percent.What is the project's modified IRR (MIRR) ?

Given the following net cash flows,determine the IRR of the project:

O'Donnell Inc.has a required rate of return of 11.5 percent.The company has a project with the following cash flows: What is the project's modified internal rate of return (MIRR) ?

An investment project has an initial cost,and then generates inflows of $50 a year for the next five years.The project has a payback period of 3.6 years.What is the project's internal rate of return?

A company is analyzing two mutually exclusive projects,S and L,whose cash flows are shown below: The company's required rate of return is 12 percent.What is the IRR of the better project? (Hint: Note that the better project may or may not be the one with the higher IRR.)

Your company is choosing between following non-repeatable,equally risky,mutually exclusive projects with the cash flows shown below.Your required rate of return is 10 percent.How much value will your firm sacrifice if it selects the project with the higher IRR?

Mooradian Corporation estimates that its required rate of return is 11 percent.The company is considering two mutually exclusive projects whose after-tax cash flows are as follows: What is the modified internal rate of return (MIRR) of the project with the highest NPV?

Woodson Inc.has two possible projects,Project A and Project B,with the following cash flows: At what required rate of return do the two projects have the same net present value (NPV) ? (In other words,what is the "crossover rate" of the projects' NPV profiles?)