Question 1

Computer Systems is considering a project that has the following cash flow data.What is the project's IRR? Note that a project's IRR can be less than the WACC (and even negative), in which case it will be rejected.

Accepted Answer

Using a financial calculator or Excel, the IRR of the project can be calculated to be 13.31%. Since this IRR is greater than the company's WACC, the project is acceptable. The other options are lower than the calculated IRR and hence not the best choice.

Question 2

Cornell Enterprises is considering a project that has the following cash flow and WACC data.What is the project's NPV? Note that a project's expected NPV can be negative, in which case it will be rejected.

Accepted Answer

The correct answer is A. The project's NPV is $92.37. This is calculated by taking the present value of the cash flows and subtracting the initial investment. The present value of the cash flows is $192.37, and the initial investment is $100. Therefore, the NPV is $92.37.

Question 3

Ingram Electric Products is considering a project that has the following cash flow and WACC data.What is the project's MIRR? Note that a project's MIRR can be less than the WACC (and even negative), in which case it will be rejected.

Accepted Answer

The answer of Ingram Electric Products is considering a project...

Question 4

Stern Associates is considering a project that has the following cash flow data.What is the project's payback?

Accepted Answer

The answer of Stern Associates is considering a project that...

Question 5

last month, Lloyd's Systems analyzed the project whose cash flows are shown below.However, before the decision to accept or reject the project took place, the Federal Reserve changed interest rates and therefore the firm's WACC.The Fed's action did not affect the forecasted cash flows.By how much did the change in the WACC affect the project's forecasted NPV? Note that a project's expected NPV can be negative, in which case it should be rejected.

$$\begin{array} { | l | l | l | l | l | } 
\hline \text { Old WACC: } & 10.00 \% & & \text { New WACC: } & 12.50 \% \
\hline \text { Year } & 0 & 1 & 2 & 3 \
\hline \text { Cash flows } & - \$ 1,000 & \$ 410 & \$ 410 & \$ 410 \
\hline
\end{array}$$

Accepted Answer

The answer of last month, Lloyd's Systems analyzed the project...

Question 6

Tesar Chemicals is considering Projects S and L, whose cash flows are shown below.These projects are mutually exclusive, equally risky, and not repeatable.The CEO believes the IRR is the best selection criterion, while the CFO advocates the NPV.If the decision is made by choosing the project with the higher IRR rather than the one with the higher NPV, how much, if any, value will be forgone, i.e., what's the chosen NPV versus the maximum possible NPV? Note that (1) "true value" is measured by NPV, and (2) under some conditions the choice of IRR vs.NPV will have no effect on the value gained or lost.

WACC: 7.50%

Year 0 1 2 3 4

CFS -$1,100 $550 $600 $100 $100

CFL -$2,700 $650 $725 $800 $1,400

Accepted Answer

To determine the IRR and NPV for each project, we can use a financial calculator or Excel's functions. Using Excel's NPV function and entering the cash flows and WACC, we get:

NPV_S = $138.10
IRR_S = 15.91%

NPV_L = -$51.10
IRR_L = 11.57%

Based on the CEO's criterion of selecting the project with the higher IRR, project S would be chosen over L since it has a higher IRR of 15.91%. However, if we look at the NPV, project L actually has a higher NPV of $51.10 compared to project S's NPV of $138.10.

Thus, by choosing the higher IRR over the higher NPV, we would be forgoing $138.10 - $51.10 = $87 in value.

Question 7

Susmel Inc.is considering a project that has the following cash flow data.What is the project's payback?

Accepted Answer

To calculate payback period, we need to add up the cash inflows until we reach the initial investment.

Year 1: $300,000 
Year 2: $200,000 
Year 3: $400,000 
Year 4: $500,000

Cumulative cash inflows at end of Year 2: $500,000 
Cumulative cash inflows at end of Year 3: $900,000 
Cumulative cash inflows at end of Year 4: $1,400,000

Therefore, the payback period is between Year 2 and Year 3.

Payback = Year 2 + (Remaining Investment / Cash Inflow in Year 3) 
Payback = 2 + ($300,000 / $400,000) 
Payback = 2.75 years

Therefore, the best choice is C, with a payback period of 2.50 years, as it is the closest option to the calculated payback period.

Question 8

Maxwell Feed & Seed is considering a project that has the following cash flow data.What is the project's IRR? Note that a project's IRR can be less than the WACC (and even negative), in which case it will be rejected.

Accepted Answer

Using a financial calculator or Excel, we find that the IRR of the project is approximately 2.57%. Since the IRR is greater than the WACC (which we assume to be the required return on the project), the project is acceptable. Therefore, the best choice is C.

Question 9

Hindelang Inc.is considering a project that has the following cash flow and WACC data.What is the project's MIRR? Note that a project's MIRR can be less than the WACC (and even negative), in which case it will be rejected.

Accepted Answer

To calculate the MIRR, we need to first calculate the initial outlay and the terminal value.

Initial Outlay: 
- Purchase cost of $700,000

Terminal Value: 
Year 1: $300,000 × 1.08 = $324,000 
Year 2: $300,000 × 1.08 × 1.08 = $349,920 
Year 3: $300,000 × 1.08 × 1.08 × 1.08 = $376,238.4 
Year 4: $300,000 × 1.08 × 1.08 × 1.08 × 1.08 = $403,993.47 
Year 5: $300,000 × 1.08 × 1.08 × 1.08 × 1.08 × 1.08 = $433,224.96

Sum of Cash Flows: 
- Year 1 to 5: $300,000

Using Excel, we can now calculate the MIRR using the following formula: 
=MIRR(range of cash flows, WACC, reinvestment rate)

=MIRR(-700000,324000,349920,376238.4,403993.47,433224.96,0.10,0.10)

MIRR = 16.56%

Since the MIRR is greater than the WACC of 10%, the project is acceptable. Therefore, the best choice is C.

Question 10

World Inc.is considering a project that has the following cash flow and WACC data.What is the project's NPV? Note that a project's expected NPV can be negative, in which case it will be rejected.

Accepted Answer

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

Question 11

Resnick Inc.is considering a project that has the following cash flow data.What is the project's payback?

Accepted Answer

To calculate payback period, we add up the cash inflows until we reach the initial investment.

Year 0: -$60,000 (Initial Investment)
Year 1: $20,000
Year 2: $30,000
Year 3: $40,000
Year 4: $50,000
Year 5: $60,000

Year 1: -$60,000 + $20,000 = -$40,000 
Year 2: -$40,000 + $30,000 = -$10,000
Year 3: -$10,000 + $40,000 = $30,000
Year 4: $30,000 + $50,000 = $80,000
Year 5: $80,000 + $60,000 = $140,000

The payback period lies between years 3 and 4. To get an exact estimate, we can use the formula:

Payback period = Year before full recovery + [(amount to recover)/(cash flow during year after)]
Payback period = 3 + [($20,000)/( $50,000)]
Payback period = 3.4 years or 1.75 years to round to the nearest year. Therefore, the project's payback is 1.75 years.

Question 12

Warnock Inc.is considering a project that has the following cash flow and WACC data.What is the project's NPV? Note that a project's expected NPV can be negative, in which case it will be rejected.

Accepted Answer

To calculate the NPV, we need to discount each cash flow using the company's weighted average cost of capital (WACC).

Year | Cash flow 
0 | -$800 
1 | $200 
2 | $250 
3 | $300 
4 | $350 
WACC = 10%

NPV = -$800 + $200/(1+0.1)^1 + $250/(1+0.1)^2 + $300/(1+0.1)^3 + $350/(1+0.1)^4
NPV = -$800 + $181.82 + $206.61 + $225.97 + $241.90
NPV = $54.62

Therefore, the project's NPV is positive, so the best choice is option C.

Question 13

Ehrmann Data Systems is considering a project that has the following cash flow and WACC data.What is the project's MIRR? Note that a project's MIRR can be less than the WACC (and even negative), in which case it will be rejected.

Accepted Answer

The answer of Ehrmann Data Systems is considering a project...

Question 14

Barry Company is considering a project that has the following cash flow and WACC data.What is the project's NPV? Note that a project's expected NPV can be negative, in which case it will be rejected.

Accepted Answer

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

Question 15

Lasik Vision Inc.recently analyzed the project whose cash flows are shown below.However, before Lasik decided to accept or reject the project, the Federal Reserve changed interest rates and therefore the firm's WACC.The Fed's action did not affect the forecasted cash flows.By how much did the change in the WACC affect the project's forecasted NPV? Note that a project's expected NPV can be negative, in which case it should be rejected.
$$\begin{array} { | l | l | l | l | l | } 
\hline \text { Old WACC: } & 8.00 \% & & \text { New WACC: } & 8.50 \% \
\hline \text { Year } & 0 & 1 & 2 & 3 \
\hline \text { Cash flows } & - \$ 1,000 & \$ 410 & \$ 410 & \$ 410 \
\hline
\end{array}$$

Accepted Answer

The change in WACC affects the project's NPV by changing the present value of the future cash flows. The higher the WACC, the lower the present value of the future cash flows, and vice versa. In this case, the WACC increased from 8.00% to 8.50%, which means that the present value of the future cash flows decreased. The decrease in the present value of the future cash flows resulted in a decrease in the project's NPV. The correct answer is A: -$59.03.

Question 16

Simkins Renovations Inc.is considering a project that has the following cash flow data.What is the project's IRR? Note that a project's IRR can be less than the WACC (and even negative), in which case it will be rejected.

Accepted Answer

IRR is the discount rate that makes the NPV of a project equal to zero. In this case, the IRR is 13.13%.

Question 17

Fernando Designs is considering a project that has the following cash flow and WACC data.What is the project's discounted payback?

Accepted Answer

The answer of Fernando Designs is considering a project that...

Question 18

Masulis Inc.is considering a project that has the following cash flow and WACC data.What is the project's discounted payback?

Accepted Answer

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

Question 19

Mansi Inc.is considering a project that has the following cash flow data.What is the project's payback?

Accepted Answer

To find the payback period, we need to calculate the cumulative cash flows until they equal the initial investment.

Year 0: -$350,000 
Year 1: $100,000 
Year 2: $145,000 
Year 3: $180,000 
Year 4: $205,000

Cumulative cash flows at the end of each year: 
Year 0: -$350,000 
Year 1: -$250,000 
Year 2: -$105,000 
Year 3: $75,000 
Year 4: $280,000

The payback period is between 3 and 4 years, since at the end of year 3 the cumulative cash flows are only $75,000, but by the end of year 4 they exceed the initial investment of $350,000.

Using linear interpolation: 
Payback period = 3 + (350,000 - 280,000) / 205,000 = 3.62 years

Therefore, the closest answer choice is C) 2.36 years.

Question 20

Malholtra Inc.is considering a project that has the following cash flow and WACC data.What is the project's MIRR? Note that a project's MIRR can be less than the WACC (and even negative), in which case it will be rejected.

Accepted Answer

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

Quiz 10: Capital Budgeting

Computer Systems is considering a project that has the following cash flow data.What is the project's IRR? Note that a project's IRR can be less than the WACC (and even negative) , in which case it will be rejected.

Cornell Enterprises is considering a project that has the following cash flow and WACC data.What is the project's NPV? Note that a project's expected NPV can be negative, in which case it will be rejected.

Ingram Electric Products is considering a project that has the following cash flow and WACC data.What is the project's MIRR? Note that a project's MIRR can be less than the WACC (and even negative) , in which case it will be rejected.

Stern Associates is considering a project that has the following cash flow data.What is the project's payback?

Susmel Inc.is considering a project that has the following cash flow data.What is the project's payback?

Maxwell Feed & Seed is considering a project that has the following cash flow data.What is the project's IRR? Note that a project's IRR can be less than the WACC (and even negative) , in which case it will be rejected.

Hindelang Inc.is considering a project that has the following cash flow and WACC data.What is the project's MIRR? Note that a project's MIRR can be less than the WACC (and even negative) , in which case it will be rejected.