Question 1

Datta Computer Systems is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected 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 can calculate the project's IRR to be approximately 13.31%. This is greater than the project's WACC, so the project should be accepted.

Question 2

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 3

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

Accepted Answer

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

Year 1: $300,000
Year 2: $200,000
Year 3: $400,000
Year 4: $100,000

Cumulative cash inflows:
Year 1: $300,000
Year 2: $500,000
Year 3: $900,000
Year 4: $1,000,000 (break even)

Therefore, the payback period is 2 years + ( $100,000 ÷ $400,000 ) = 2.25 years.

The closest option is C which is 2.36 years.

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

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 projected NPV can be negative, in which case it will be rejected.

Accepted Answer

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

Question 6

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 projected MIRR can be less than the WACC (and even negative), in which case it will be rejected.

Accepted Answer

To calculate the MIRR, we first need to calculate the terminal value of the cash inflows using the WACC as the discount rate:

CFt      |     PV at WACC
------------------------
-$575,000|   -$575,000
$200,000 |    $182,243
$250,000 |    $202,221
$300,000 |    $220,623
$350,000 |    $237,681
$400,000 |    $253,598

Terminal value = $253,598 * (1 + WACC)^5 = $357,410

Next, we calculate the future value of the initial outflow (negative cash flow) at the MIRR, such that the net present value of all cash flows is zero:

PV inflows = PV outflows
$357,410 = -$575,000 + $200,000 / (1 + MIRR)^1 + $250,000 / (1 + MIRR)^2
+ $300,000 / (1 + MIRR)^3 + $350,000 / (1 + MIRR)^4 + $400,000 / (1 + MIRR)^5

Using trial and error, we find that the MIRR that equates these cash flows is approximately 16.56%. Since this is greater than the WACC of 12%, the project should be accepted.

Question 7

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 projected 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 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 projected IRR can be less than the WACC (and even negative), in which case it will be rejected.

Accepted Answer

The answer of Maxwell Feed & Seed is considering a...

Question 9

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 need to determine the point in time when the cumulative cash inflows equal the initial investment.

Year 1: $400,000
Year 2: $400,000
Year 3: $300,000
Year 4: $200,000
Year 5: $100,000

Cumulative cash flows:
Year 1: $400,000
Year 2: $800,000
Year 3: $1,100,000
Year 4: $1,300,000
Year 5: $1,400,000

Based on this, we see that the cumulative cash inflows equal the initial investment of $1,000,000 in year 3, so the payback period is 3 years.

The closest choice is C, 1.75 years. This is incorrect, as the payback period is not less than one full year.

Question 10

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 projected IRR can be less than the WACC (and even negative), in which case it will be rejected.

Accepted Answer

The answer of Simkins Renovations Inc. is considering a project...

Question 11

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 projected NPV can be negative, in which case it will be rejected.

Accepted Answer

To calculate the NPV of the project, we need to discount each cash flow using the given WACC of 10%.

Year 0: -$1,000
Year 1: $350 / (1+0.1)^1 = $318.18
Year 2: $400 / (1+0.1)^2 = $330.58
Year 3: $450 / (1+0.1)^3 = $340.29
Year 4: $500 / (1+0.1)^4 = $349.08

Add up the discounted cash flows and subtract the initial investment:
NPV = -$1,000 + $318.18 + $330.58 + $340.29 + $349.08 = $277.94

Therefore, the best choice is B.

Question 12

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.

Accepted Answer

Project S:
Initial Investment = $400
Cash flows:
Year 1: $150
Year 2: $180
Year 3: $210

Project L:
Initial Investment = $600
Cash flows:
Year 1: $260
Year 2: $320
Year 3: $380

Calculating the IRR and NPV for both projects:

IRR:

Project S:
IRR = 21.67%

Project L:
IRR = 18.45%

NPV (Assuming the company's cost of capital to be 10%):

Project S:
NPV = $134.55

Project L:
NPV = $272.65

If the company chooses the project with the higher IRR, which is Project S, the forgone value will be the difference between the NPV of Project S and the maximum possible NPV, which is the NPV of Project L. Therefore, the forgone value will be:

$272.65 - $134.55 = $138.10

Hence, the best choice for the company would be to choose Project L based on the higher NPV.

Question 13

Susmel 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 determine the point in time when the cumulative cash inflows equal the initial investment.

Year 0: -$37,500
Year 1: $10,000
Year 2: $12,500
Year 3: $15,000
Year 4: $17,500
Year 5: $20,000

Cumulative cash inflows:
Year 0: -$37,500
Year 1: -$27,500 ($10,000 - $37,500)
Year 2: -$15,000 ($27,500 - $12,500)
Year 3: $0 ($15,000 - $15,000)
Payback period is between years 2 and 3. 
$15,000 / $17,500 = 0.8571
Payback period = 2 + 0.8571 = 2.8571 years
Therefore, the answer is closest to 2.5 years (Choice C).

Question 14

Jazz 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 projected NPV can be negative, in which case it will be rejected.

Accepted Answer

The answer of Jazz World Inc. is considering a project...

Question 15

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 projected 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...

Question 16

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 projected 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 17

Last month, Lloyd's Systems analyzed the project whose cash flows are shown below. However, before the decision to accept or reject the project, the Federal Reserve took actions that 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 projected NPV can be negative, in which case it should be rejected.

Accepted Answer

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

Question 18

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 projected NPV can be negative, in which case it will be rejected.

Accepted Answer

To calculate the NPV, we need to use the formula:

NPV = -Initial Investment + (CF1 / (1+WACC)^1) + (CF2 / (1+WACC)^2) + ... + (CFn / (1+WACC)^n)

Plugging in the given data, we get:

NPV = -$100 + ($20/(1+0.1)^1) + ($40/(1+0.1)^2) + ($50/(1+0.1)^3) + ($60/(1+0.1)^4) + ($70/(1+0.1)^5)
NPV = -$100 + $18.18 + $33.06 + $38.02 + $41.94 + $42.28
NPV = $54.52

Therefore, the project's NPV is $54.52, which is positive. As a result, the project should be accepted.

The closest option to this answer is option C, which is $60.52.

Question 19

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...

Question 20

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 took actions that 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 projected NPV can be negative, in which case it should be rejected.

Accepted Answer

The answer of Lasik Vision Inc. recently analyzed the project...

Quiz 11: Capital Budgeting

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

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

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

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

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 projected NPV can be 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 projected MIRR can be less than the WACC (and even 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 projected MIRR can be less than the WACC (and even negative) , in which case it will be rejected.

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 projected IRR can be less than the WACC (and even negative) , in which case it will be rejected.

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

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 projected IRR can be less than the WACC (and even negative) , in which case it will be rejected.

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 projected NPV can be negative, in which case it will be rejected.

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

Jazz 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 projected NPV can be negative, in which case it will be rejected.

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 projected MIRR can be less than the WACC (and even negative) , in which case it will be rejected.

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 projected MIRR can be less than the WACC (and even negative) , in which case it will be rejected.

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 projected NPV can be negative, in which case it will be rejected.

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