FIN:370 WK 5 PT 2.docx - FIN/370T KNOWLEDGE CHECK WEEK 5...

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FIN/370T KNOWLEDGE CHECK WEEK 5 PART 2 1. 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 percent. Should this project be accepted, and why? Yes, the project should be accepted since it has a NPV = $16,999.62 Using a financial calculator, NPV = $16,999.62. Accept since the NPV > 0. 2. Which of these are sets of cash flows where all initial cash flows are negative and all the subsequent one are either zero or positive? Normal Cash Flows 3. Compute the MIRR statistic for Project I and note whether to accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 15 percent. Project I Time 0 1 2 3 4 5 Cash Flow $ 1,000 $400 $300 $200 $300 $50 The project’s MIRR is 12.67% and the project should be rejected. Cash flows will be moved as shown: Time 0 1 2 3 4 5 Cash Flow –$1,000 $ 400 $ 300 $ 200 $ 300 $ 50 Future Value (If Positive) 699.60 456.26 264.50 345.00 $ 50 Sum of FV $1,815.36 Modified CFs –$1,000 $1,815.36
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Using a financial calculator: PV = –1,000; FV = 1,815.36; N = 5; PMT = 0; I = MIRR = 12.67
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