Question 1

Compare and contrast the IRR and the MIRR statistic.

Accepted Answer

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Question 2

For a project with normal cash flows, what would you expect the relationship to be between the MIRR and the IRR?

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The answer of For a project with normal cash flows,...

Question 3

The MIRR statistic is different from the IRR statistic in that _____________.

Accepted Answer

The Modified Internal Rate of Return (MIRR) assumes that cash inflows are reinvested at the project's cost of capital, unlike the IRR which assumes reinvestment at the IRR itself.

Question 4

Rank the capital budgeting tools from best to worst.

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The answer of Rank the capital budgeting tools from best...

Question 5

Projects A and B are mutually exclusive. Project A costs $10,000 and is expected to generate cash inflows of $4,000 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

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

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

We need to calculate the NPV of both projects using the given information and discount rate of 12%.

For Project A:
NPV = -20,000 + 7,500/(1+0.12) + 7,500/(1+0.12)^2 + 7,500/(1+0.12)^3 + 7,500/(1+0.12)^4
NPV = $1,763.01

For Project B:
NPV = -10,000 + 20,000/(1+0.12)^4
NPV = $5,585.95

Therefore, Project A has the higher NPV and should be accepted.

Question 7

A company is considering two mutually exclusive projects, A and B. 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%.

Accepted Answer

Using a financial calculator: Project A: NPV = 12.51; IRR = 15.45%; Project B: NPV = 14.12; IRR = 12.71%; NPV is best statistic; Project B is better, therefore the IRR of the best project is 12.71%

Question 8

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

The IRR (Internal Rate of Return) is the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. By calculating the IRR for the given cash flows (-$175 for 10 years and $10,000 at the end of year 10), the IRR is found to be approximately 35.93%.

Question 9

Explain the Rule of Signs as it pertains to IRR.

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Question 10

Why is a project's cost not an appropriate benchmark for its NPV?

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Question 11

Explain what a PI of 35.23% would signify.

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The answer of Explain what a PI of 35.23% would...

Question 12

The least-used capital budgeting technique in industry is ____________.

Accepted Answer

The Modified Internal Rate of Return (MIRR) is the least-used capital budgeting technique in industry. This is partially due to its complexity compared to other methods and the fact that it often produces similar results to the more popular Internal Rate of Return (IRR) method.

Question 13

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 14

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%. Should this project be accepted, and why?

Accepted Answer

We can use the formula to calculate the NPV of the project:
NPV = -Initial cost + PV of cash flows
NPV = -$91,000 + $11,000 [(1-1/(1+0.08)^20)/0.08]
NPV = -$91,000 + $221,999.62
NPV = $130,999.62
Since the NPV is positive, the project should be accepted. The correct option is (C), with a NPV of $16,999.62.

Question 15

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 correct answer is A because the NPV is equal to zero when the discount rate is equal to the internal rate of return (IRR). The IRR is the rate at which the present value of the cash flows is equal to the initial investment. In this case, the IRR is 30.10%.

Question 16

Suppose two projects with normal cash flows, X and Y, have exactly the same required initial investment, but X has a longer payback. Can we say anything about X's IRR versus that of Y?

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Question 17

Is the set of cash flows depicted below normal or non-normal? Explain.

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Question 18

A disadvantage of the payback statistic is that ___________.

Accepted Answer

All of these are disadvantages of payback. The payback statistic does not consider the time value of money, does not give an indication of the project's riskiness, and does not consider cash flows beyond the payback period. As a result, it has limitations in evaluating the profitability and viability of investment projects.

Question 19

We accept projects with a positive NPV because it means that ____________.

Accepted Answer

We accept projects with a positive NPV because it means that the project's expected return exceeds the cost of capital, which means that we are creating wealth for shareholders.

Question 20

Explain the differing reinvestment rate assumptions of NPV and IRR.

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