Project B has the following cash flows:
Project B
Year
Cash Flow
0
$200
1
150
2
100
3
50
4
50
At what cost of capital would Project A and Project B have the same net
present value (NPV)?
a. 11.19%
b. 12.23%
c. 12.63%
d. 13.03%
e. 13.27%
(The following information applies to the next two problems.)
Company A is considering a project with the following cash flows:
Project
Year
Cash Flow
0
$5,000
1
5,000
2
3,000
3
1,000
The project has a cost of capital of 10 percent.
NPV
Answer: b
Diff: E
N
132
.
What is the project’s net present value (NPV)?
a. $1,157
b. $1,273
c. $1,818
d. $2,000
e. $2,776
MIRR
Answer: c
Diff: T
N
133
.
What is the project’s modified internal rate of return (MIRR)?
a. 16.6%
b. 17.0%
c. 17.6%
d. 18.0%
e. 18.6%
Chapter 10  Page 52
(The following information applies to the next two problems.)
Company B is considering a project with the following cash flows:
Project
Year
Cash Flow
0

X
1
175
2
175
3
300
Missing cash flow, payback period, and NPV
Answer: a
Diff: M
N
134
.
Assume that the project has a regular payback period of 2 years and a cost
of capital of 10 percent.
What is the project’s net present value (NPV)?
a. $179.11
b. $204.11
c. $229.11
d. $254.11
e. $279.11
Missing cash flow, IRR, and NPV
Answer: c
Diff: M
N
135
.
Now instead of making an assumption about the payback period, instead
assume that the project has an internal rate of return (IRR) of 15
percent. Given this assumption, what would be the project’s net present
value (NPV) if the WACC equals 12 percent?
a.
$ 0.00
b. $18.08
c. $27.54
d. $37.30
e. $47.36
(The following information applies to the next four problems.)
Bell Corporation is considering two mutually exclusive projects, Project A and
Project B.
The projects have the following cash flows:
Project A
Project B
Year
Cash Flow
Cash Flow
0
500
500
1
150
300
2
200
300
3
250
350
4
100
300
Both projects have a 10 percent cost of capital.
NPV
Answer: d
Diff: E
N
136
.
What is Project A’s net present value (NPV)?
a. 30.12
b. 34.86
c. 46.13
d. 57.78
Chapter 10  Page 53
e. 62.01
IRR
Answer: a
Diff: E
N
137
.
What is Project A’s internal rate of return (IRR)?
a. 15.32%
b. 15.82%
c. 16.04%
d. 16.68%
e. 17.01%
MIRR
Answer: b
Diff: T
N
138
.
What is Project B’s modified internal rate of return (MIRR)?
a. 12.05%
b. 12.95%
c. 13.37%
d. 14.01%
e. 14.88%
Crossover rate
Answer: c
Diff: M
N
139
.
At what discount rate would the two projects have the same net present
value?
a. 4.50%
b. 5.72%
c. 6.36%
d. 7.15%
e. 8.83%
Chapter 10  Page 54
Chapter 10  Page 55
CHAPTER
10
ANSWERS
AND
SOLUTIONS
1
.
Ranking methods
Answer: b
Diff: E
A project’s NPV increases as the cost of capital declines.
A project’s IRR
is independent of its cost of capital, while a project’s MIRR is dependent
on the cost of capital since the terminal value in the MIRR equation is
compounded at the cost of capital.
2
.
Ranking conflicts
Answer: a
Diff: E
3
.
Payback period
Answer: d
Diff: E
4
.
NPV profiles
Answer: b
Diff: E
5
.
NPV
profiles
Answer: d
Diff: E
You can draw the NPV profiles to get an idea of what is happening.
(See the
diagram below.)
Statement a is false; Project B could have a higher NPV at
some WACC if the NPV profiles cross.
Statement b is false; Project B could
have a negative NPV when A’s NPV is positive.
Statement c is false; the IRR
is unaffected by the WACC.
Statement d is the correct choice.
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 Net Present Value, The Land, Internal rate of return