Old Exam Questions  Capital Budgeting  Solutions
Page 91 of 96 Pages
CFj =
$ 0.00
CFj =
$ 0.00
CFj =
$ 0.00
CFj
=
$32,837.75
I/YR = 12
Solve for MIRR = 17.1358%
Alternatively,
N = 5; PV = 14,635.98; FV = 34,328.08; Solve for I/YR = 17.1358% = MIRR
Difference = 29.2394%  17.1358% = 12.1036%
86.
You are given the following decision tree representing the cash flows for a project
(conditional probabilities are in parentheses). Assuming that the correct riskadjusted
discount rate (WACC) to use is 12 percent, determine the internal rate of return for this
project.
Year 0
Year 1
Year 2
Year 3
$300 (.5)
$400 (.5)
$500 (.5)
$500 (.5)
$500 (.5)
$600 (.5)
$700 (.5)
$900
$500 (.5)
$600 (.5)
$700 (.5)
$700 (.5)
$700 (.5)
$800 (.5)
$900 (.5)
A.
42.43%
B.
43.53%
*
C.
44.63%
D.
45.73%
E.
46.83%
The decision tree can be simplified to:
Year 0
Year 1
Year 2
Year 3
$500
$500
$500 (.5)
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View Full DocumentOld Exam Questions  Capital Budgeting  Solutions
Page 92 of 96 Pages
$900
$700
$700
$700 (.5)
which can be further simplified down to:
Year 0
Year 1
Year 2
Year 3
$900
$600
$600
$600
and the IRR can be calculated as:
CFj = $900
CFj = $600
CFj = $600
CFj
= $600
I/YR = 12
Solve for NPV = $541.10 (not needed for this problem)
Solve for IRR = 44.63%
87.
You are given the following decision tree representing the cash flows for a project
(conditional probabilities are in parentheses). Assuming that the correct riskadjusted
discount rate (WACC) to use is 12 percent, you can calculate that the net present
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 Spring '08
 Staff
 Depreciation, Net Present Value, Old Exam Questions, Alternativ ely

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