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