N = 4; I/YR = 10; PV = -406461.3073; PMT = 0; and then solve for FV = $595,100. Step 4: Calculate the MIRR: N = 4; PV = -368301.3455; PMT = 0; FV = 595100; and then solve for I/YR = MIRR = 12.7448% 12.74%. 107. MIRR Answer: e First, find the company’s weighted average cost of capital:We’re given the before-tax cost of debt, rd= 10%. We can find the cost of equity as follows: rs= 0.06 + 0.05(1.1) = 0.115 or 11.5%. Thus, the WACC is: r = 0.4(0.10)(1 - 0.3) + 0.6(0.115) = 0.097 or 9.7%. Second, the PV of all cash outflows can be calculated as follows: CF0= -50000; CF1-3= 0; CF4= -40000; I/YR = 9.7. Solve for NPV of costs = -$77,620.62. Third, find the terminal value of the project at t = 4: CF0= 0; CF1= 35000; CF2= 43000; CF3= 60000; CF4= 0; I/YR = 9.7. Solve for NPV = $113,086.76. Use the TVM keys to calculate the future value of this present value. N = 4; I/YR = 9.7; PV = -113086.76; PMT = 0. Solve for FV = $163,771.48. Finally, calculate the MIRR: N = 4; PV = -77620.62; PMT = 0; FV = 163771.48; and then solve for I/YR = MIRR = 20.52%.

Chapter 11: The Basics of Capital BudgetingPage 699108. MIRR Answer: b Time line (in thousands): 0 = 12%1 10 11 20 -7,000 500 -500 500 500 -161-7,161= PV of outflows TV of inflows: 34,473.30Calculation of PV of outflows: CF0= -7000; CF1-9= 0; CF10= -500; I/YR = 12; and then solve for NPV = -$7,160.99 -$7,161. Calculation of TV of inflows: CF0= 0; CF1-9= 500; CF10= 0; CF11-20= 500; I/YR = 12. Solve for NPV = $3,573.74. Use TVM to calculate the future value of the present value. N = 20; I/YR = 12; PV = -3573.74; PMT = 0. Solve for FV = $34,473.30. Calculation of MIRR: N = 20; PV = -7161; PMT = 0; FV = 34473.30; and then solve for I/YR = MIRR = 8.17%. Note: IRR = 2.52% and NPV = -$3,587,251. Both are consistent with MIRR less than WACC = 12%. 109. PV of cash flows Answer: c Financial calculator solution: Old lease: Inputs: N = 60; I/YR = 11/12 = 0.9167; PMT = 1000; FV = 0. Output: PV = -$45,993.03. New lease: CF0= 0; CF1-6= 0; CF7-60= 1050; I/YR = 11/12 = 0.9167; and then solve for NPV = -$42,189.97. Therefore, the PV of payments under the proposed lease would be less than the PV of payments under the old lease by $45,993.03 - $42,189.97 = $3,803.06. Sally should accept the new lease because it would raise her theoretical net worth by $3,803.06. 110. Payback period Answer: b Payback is how long it takes for a firm to recoup its initial investment.

Page 700Chapter 11: The Basics of Capital BudgetingProject Cumulative Year Cash Flow Cash Flow 0 -$300 -$300 1 125 -175 2 75 -100 3 200 100 4 100 200 Therefore, the project has a payback of 2 + $100/$200 = 2.5 years. 111. Discounted payback Answer: d We must find the PVs of the cash flows using the firm’s 10% WACC. Discounted Year Cash Flow Cash Flow @ 10% Cumulative PV 0 -$300 -$300.00 -$300.00 1 125 125/1.10 = 113.64 -186.36 2 75 75/(1.10)2= 61.98 -124.38 3 200 200/(1.10)3= 150.26 +25.88 4 100 100/(1.10)4= 68.30 +94.18 Therefore, the project’s discounted payback is2 + 26.150$38.124$= 2.83 years. 112. IRR Answer: d Financial calculator solution: CF0= -300; CF1= 125; CF2= 75; CF3= 200; CF4= 100; and then solve for IRR = 23.42%. 113. NPV Answer: c Financial calculator: CF0= -300; CF1= 125; CF2= 75; CF3= 200; CF4= 100; I/YR = 10; and solve for NPV = 94.18 = $94.18 million. 114. MIRR Answer: c To calculate the MIRR, we need to find the PV of all the outflows and the FV of all the inflows. The discount rate that equates the two is the MIRR. PV of inflows FV of outflows -$300 $125 1.103= $166.375 $ 75 1.102= 90.750 $200 1.101= 220.000 $100 1.100= 100.000 $577.125 Using a financial calculator:

Chapter 11: The Basics of Capital BudgetingPage 701N = 4; PV = -300; PMT = 0; FV = 577.125; and then solve for I/YR = MIRR = 17.77%.

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