FM11 12 - 11-11 Project X: 0 12% | -1,000 1 2 3 4 | | | |...

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Unformatted text preview: 11-11 Project X: 0 12% | -1,000 1 2 3 4 | | | | 100 300 400 700.00 448.00 376.32 140.49 1,664.81 1,000 13.59% = MIRRX` $1,000 = $1,664.81/(1 + MIRRX)4. Project Y: 0 12% | -1,000 1 2 3 4 | | | | 100 50 50.00 56.00 125.44 1,404.93 1,636.37 1,000 1,000 13.10% = MIRRY $1,000 = $1,636.37/(1 + MIRRY)4. Thus, since MIRRX > MIRRY, Project X should be chosen. Alternative step: You could calculate NPVs, see that Project X has the higher NPV, and just calculate MIRRX. NPVX = $58.02 and NPVY = $39.94. 11-12 a. Purchase price Installation Initial outlay $ 900,000 165,000 $1,065,000 CF0 = -1065000; CF1-5 = 350000; I = 14; NPV = ? NPV = $136,578; IRR = 19.22%. b. Ignoring environmental concerns, the project should be undertaken because its NPV is positive and its IRR is greater than the firm's cost of capital. c. Environmental effects could be added by estimating penalties or any other cash outflows that might be imposed on the firm to help return the land to its previous state (if possible). These outflows could be so large as to cause the project to have a negative NPV--in which case the project should not be undertaken. Answers and Solutions: 11 - 12 ...
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