Instructions: Please answer each of the seven (7) practice problems below. Also, please also
show as much of your solution steps as is feasible in the space provided beneath each problem.
Please be sure to round your answers to two (2) decimal places; also, please note that for
problems dealing with a percentage answer such as rates of return on stocks, your calculator
should be set to four (4) decimal places so that after converting your answer to percentage terms
your final solution will be rounded to two places. As you know, this homework assignment is
due by Sunday, November 24, 2013 (by midnight).
1. A company is faced with two independent investment opportunities. The corporation has an
investment policy which requires acceptable projects to recover all costs within 3 years. The
corporation uses the discounted payback method to assess potential projects and utilizes a
discount rate of 10 percent. The cash flows for the two projects are:
Year
0
1
2
3
4
Project A
Cash Flow
-$100,000
40,000
40,000
40,000
30,000
Project B
Cash Flow
-$80,000
50,000
20,000
30,000
0
Which is the discounted payback for each project?
2. The Seattle Corporation has been presented with an investment opportunity which will yield
end-of-year cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5
through 9, and $40,000 in Year 10. This investment will cost the firm $150,000 today, and the
firm's cost of capital is 10 percent. What is the NPV for this investment? Now assume the
Federal Reserve takes actions which increases interest rates and therefore impacts the firm’s
WACC. If the new WACC for Seattle Corporation becomes 14 percent 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.
3. Shannon Industries is considering a project which has the following cash flows:
Year
0
1
2
3
4
Cash Flow
?
$2,000
3,000
3,000
1,500
The project has a payback of 2.5 years. The firm’s cost of capital is 12 percent. What is the
project’s net present value NPV?
4. Alyeska Salmon Inc., a large salmon canning firm operating out of Valdez, Alaska, has a new
automated production line project it is considering. The project has a cost of $275,000 and is
expected to provide after-tax annual cash flows of $73,306 for eight years. The firm's
management is uncomfortable with the IRR reinvestment assumption and prefers the modified
IRR approach. You have calculated a cost of capital for the firm of 12 percent. What is the
project's MIRR?
5. What is the internal rate of return for a project that has a net investment of $75,000 and the
following net cash flows: Year 1 = $15,000; Year 2 = $20,000; Year 3 = $25,000; Year 4 =
$30,000?
6. Scott Corporation's new project calls for an investment of $10,000. It has an estimated life of
10 years. The IRR has been calculated to be 15 percent. If cash flows are evenly distributed and
the tax rate is 40 percent, what is the annual before-tax cash flow each year? (Assume
depreciation is a negligible amount.)
7. A CFO is considering a project that has the following cash flow and WACC data. What is the
project's MIRR? Note that a project's projected MIRR can be less than the WACC (and even
negative), in which case it will be rejected. The firm’s WACC is 15%.
Project A
Year
Cash Flow
0
-$800
1
350
2
350
3
350
Top Answer
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