Project B has the following cash flows Project B Year Cash Flow 200 1 150 2 100

Project b has the following cash flows project b year

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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
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(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
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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
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Chapter 10 - Page 55 CHAPTER 10 ANSWERS AND SOLUTIONS
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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. 0
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