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Lecture 6 Quiz

# Lecture 6 Quiz - = 16 000 PV = PV So =)= = PI PV inflows PV...

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Lecture 6 Quiz 1) You are evaluating a project that is expected to cost \$2.2 million in initial investment and it is expected to generate an end of year cash flow of \$1.0 million each year for three years. The discount rate is 11%. What is the MIRR of this investment? a) 10.89% b) The same as the IRR in this case. c) 17.27% d) 14.96% e) 11% For the MIRR, you have to find the future value of each cash inflow as of the end of year 3: CF 3 : the FV is simply \$1 million, since you receive it at t=3. CF 2 : compound 1 period forward o 1 million (1.11) = 1.11 million CF 1 : compound 2 periods forward o 1 million (1.11) 2 = 1.232 million The sum of these future values is: o 1+1.11+1.232 = 3.342 Now find the interest rate that equates the PV of 2.2 with the FV of 3.342: o N: 3 o I: ? 14.96% o PV: (2.2) o PMT: 0 o FV: 3.342 2) Project Z’s only cash outflow is its cost of \$10,000. The project has a NPV of \$16,000. What is the profitability index for this project? a) 1.2 b) 2.6 c) 1.7 d) 1.6 e) 0.6 You first need to find the PV (inflows): = - NPV
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Unformatted text preview: , =- , 16 000 PV inflows 10 000 = , PV inflows 26 000 So: = ( ) ( )= , , = . PI PV inflows PV outflows 26 00010 000 2 6 3) If a project has an IRR that is equal to the discount rate, the NPV for the project is: a) Neither here nor there b) Either positive or negative c) Negative d) Zero e) Positive 4) The Green Thumb Landscaping Company can purchase equipment on sale for \$3200. The asset has a two-year life, and will produce \$800 in the first year, and \$3000 in the second year. The cost of capital is 15%. Should this project be accepted? a) b) No c) Yes d) Maybe so e) I don’t know Using either the NPV or the IRR will provide the same decision: NPV = -235.92 IRR = 10.13% 5) The factors that cause problems with the use of IRR in projects that are mutually exclusive are: a) Scale and reversing flow problems b) Timing and scale problems c) The differential equations problem d) The IRR complexity problem and the scale problem...
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