CF
0
= 0; CF
12
= 25000; CF
35
= 50000; I = 12; and then solve for NPV
= $137,987.53.
N = 5; I = 12; PV = 137987.53; PMT = 0; and then solve for FV =
$243,181.18.
Step 2: Find the MIRR, which is the discount rate that equates the cash
inflows and outflows:
N = 5; PV = 100000; PMT = 0; FV = 243181.18; and then solve for I
= MIRR = 19.45%.
83. MIRR and CAPM
Answer: d
Diff: M
R
Time line:
0
1
2
3
Years




2,028
1,000
1,000
1,000
1,160.00
1,345.60
3,505.60
2,028
MIRR = 20%
k = 16%
1.16
(1.16)
2
Step 1:
Calculate the historical beta:
Regression method: Financial calculator: Different calculators have
different list entry procedures and key stroke sequences.
Enter Ylist:
Inputs:
Item(1) = 9 INPUT; Item(2) = 15 INPUT;
Item(3) = 36 INPUT.
Enter Xlist:
Inputs:
Item(1) = 6 INPUT; Item(2) = 10 INPUT;
Chapter 10  Page 78
Item(3) = 24 INPUT; use linear model.
Output:
m or slope = 1.50.
Graphical/numerical method:
Slope = Rise/Run =
(36%  9%)/(24%  6%)
= 27%/18% = 1.5. Beta = 1.5.
Step 2:
Calculate cost of equity using CAPM and beta and given inputs:
k
e
= k
RF
+ (RP
M
)Beta = 7.0% + (6%)1.5 = 16.0%.
Step 3:
Calculate TV of inflows:
Inputs:
N = 3; I = 16; PV = 0; PMT = 1000.
Output:
FV = $3,505.60.
Step 4:
Calculate MIRR:
Inputs:
N = 3; PV = 2028; PMT = 0; FV = 3505.60.
Output:
I = 20.01 = MIRR
20%.
84.
MIRR and missing cash flow
Answer: d
Diff: M
The upfront cost can be calculated using the payback:
$400 + ($500)(0.5) = $650.
The terminal value of the cash inflows are:
($400)(1.1)
2
+ ($500)(1.1) + $200 = $1,234.
Use your calculator to obtain the MIRR:
Enter N = 3; PV = 650; PMT = 0; FV = 1234; and then solve for MIRR = I =
23.82%.
85.
MIRR, payback, and missing cash flow
Answer: d
Diff: M
Step 1: Solve for the CF
0
by knowing the payback is exactly 2.0:
The CF
0
for the project is $1 + $1.5 = $2.5 million.
Step 2: Find the FV of the cash inflows:
FV = $2.50 + ($2.00)(1.12)
1
+ ($1.50)(1.12)
2
+ ($1.00)(1.12)
3
= $2.50 + $2.24 + $1.88160 + $1.40493
= $8.026530 million.
Step 3: Solve for the MIRR:
Enter the following input data in the calculator:
N = 4; PV = 2.5; PMT = 0; FV = 8.026530; and then solve for
I = MIRR = 33.85881%
33.86%.
86. MIRR and IRR
Answer: e
Diff: M
Time line:
0
k = 8%
1
5
20,000
7,000
7,000
IRR
T
= 22.11%.
Calculate MIRR
T
:
Find TV of cash inflows:
Chapter 10  Page 79
N = 5; I = 8; PV = 0; PMT = 7000; and then solve for FV = TV = $41,066.21.
Find MIRR
T
= 15.48%:
N = 5; PV = 20000; PMT = 0; FV = 41066.21; and then solve for I = MIRR =
15.48%.
Sum = 22.11% + 15.48% = 37.59%.
87. Mutually exclusive projects
Answer: b
Diff: M
Time line:
IRR
A
= ?
0
IRR
B
= ?
1
2
3
Years
CF
A
100,000
39,500
39,500
39,500
CF
B
100,000
0
0
133,000
Financial calculator solution:
Project A:
Inputs:
CF
0
= 100000; CF
1
= 39500; N
j
= 3.
Output:
IRR
A
= 8.992%
9.0%.
Project B:
Inputs:
CF
0
= 100000; CF
1
= 0; N
j
= 2; CF
2
= 133000.
Output:
IRR
B
= 9.972%
10.0%.
The firm’s cost of capital is not given in the problem; so use the IRR
decision rule.
Since IRR
B
> IRR
A
; Project B is preferred.
88. Beforetax cash flows
Answer: b
Diff: M
Time line:
0
IRR = 15%
1
2
3
4
10 Years
10,000
PMT = ?
PMT
PMT
PMT
PMT
Financial calculator solution:
Inputs:
N = 10; I = 15; PV = 10000; FV = 0.
Output: PMT = $1,992.52.
Beforetax CF = $1,992.52/0.6 = $3,320.87
$3,321.
89. Crossover rate
Answer: b
Diff: M
Find the differences between the two projects’ re
spective cash flows as
follows:
(CF
A
 CF
B
).
CF
0
= 5,000  (5,000) = 0; CF
1
= 200  3,000 = 2800; CF
2
= 
2200; CF
3
= 2200; CF
4
= 4800.
Enter these CFs and find the IRR = 16.15%,
which is the crossover rate.
Chapter 10  Page 80
90. Crossover rate
Answer: b
Diff: M
First, find the differential CFs by subtracting Team A CFs from Team B CFs as
follows:
CF
0
= 5.5; CF
1
= 0; CF
2
= 0; CF
3
= 4; CF
4
= 4; and then solve for IRR = 11.35%.
You've reached the end of your free preview.
Want to read all 99 pages?
 Fall '13
 Schnusenberg
 Net Present Value, The Land, Internal rate of return