Problem 1
Suppose a company is considering two independent projects, Project A and Project B.
The cash outlay for Project A is $14,000. The cash outlay for Project B is $20,000. The
company’s cost of capital is 12%. The following table shows the after-tax cash flows.
For each project, compute the NPV, the IRR, the MIRR, and indicate the accept/reject
decision.
Year
Project A
Project B
1
$4800
$6700
2
$4800
$6700
3
$4800
$6700
4
$4800
$6700
Problem 2
Suppose a company is considering two investment projects. Both projects require an
upfront expenditure of $30 million. The company estimates that the cost of capital is
10% and that the investments will result in the following after-tax cash flows (in millions
of dollars). Complete parts (a) through (e) below.
Year
1
2
3
4
Project A
$28
$20
$10
$5
Project B
$10
$15
$20
$25
a) Find the regular payback period for each project.
b) Find the discounted payback period for each project.
c) Assume that the two projects are independent and the cost of capital is 10%. Which
project or projects should the company undertake? Base your results on the NPV.
d) Assume that the two projects are mutually exclusive and the cost of capital is 5%.
Which project or projects should the company undertake? Base your results on the
MIRR.
e) Explain why quantitative measures may not always be the best way to evaluate a
project.
Problem 3
A company is planning an expansion. The initial investment is $480,000 and anticipates
cash inflows as listed below. The cost of capital is 12.2%. What is the profitability index
and should the firm go ahead with the project?
Years
1
2
3
4
5
Cash Inflows
$90,000
105,000
105,000
195,000
195,000
6
195,000
Problem 4
Last month, a company decided to accept the project whose cash flows are shown
below. However, before actually starting the project, the Federal Reserve took actions
that lowered interest rates and therefore the firm’s WACC. By how much did the
change in the WACC affect the project's forecasted NPV? That is, find the ΔNPV
resulting from the Federal Reserve actions.
New WACC = 8%
Year
0
1
2
3
Old WACC = 11%
Cash Flows
-$1,000
500
500
500
Problem 5
A project requires a net investment of $450,000. It has a profitability index of 1.25 based
on the firm's 12 percent cost of capital. Determine the net present value of the project.
PV = 1.25*450,000 = 562,500
NPV = 562,500 - 450,000 = $112,500
Attached Excel file... View the full answer
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