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Ranking conflicts Answer: a Diff: E

Discounted payback Answer: e Diff: E

45. Coughlin Motors is considering a project with the following expected cash flows:

Project

Year Cash Flow

0 -$700 million

1 200 million

2 370 million

3 225 million

4 700 million

The project’s WACC is 10 percent. What is the project’s discounted payback?

a. 3.15 years

b. 4.09 years

c. 1.62 years

d. 2.58 years

e. 3.09 years

Discounted payback Answer: d Diff: E

46. A project has the following cash flows:

Project

Year Cash Flow

0 -$3,000

1 1,000

2 1,000

3 1,000

4 1,000

Its cost of capital is 10 percent. What is the project’s discounted payback period?

a. 3.00 years

b. 3.30 years

c. 3.52 years

d. 3.75 years

e. 4.75 years

Discounted payback Answer: e Diff: E N

47. Project A has a 10 percent cost of capital and the following cash flows:

Project A

Year Cash Flow

0 -$300

1 100

2 150

3 200

4 50

What is Project A’s discounted payback?

a. 2.25 years

b. 2.36 years

c. 2.43 years

d. 2.50 years

e. 2.57 years

NPV Answer: a Diff: E

48. As the director of capital budgeting for Denver Corporation, you are evaluating two mutually exclusive projects with the following net cash flows:

Project X Project Z

Year Cash Flow Cash Flow

0 -$100,000 -$100,000

1 50,000 10,000

2 40,000 30,000

3 30,000 40,000

4 10,000 60,000

If Denver’s cost of capital is 15 percent, which project would you choose?

a. Neither project.

b. Project X, since it has the higher IRR.

c. Project Z, since it has the higher NPV.

d. Project X, since it has the higher NPV.

e. Project Z, since it has the higher IRR.

NPV Answer: a Diff: E

49. Two projects being considered are mutually exclusive and have the following projected cash flows:

Project A Project B

Year Cash Flow Cash Flow

0 -$50,000 -$50,000

1 15,625 0

2 15,625 0

3 15,625 0

4 15,625 0

5 15,625 99,500

If the required rate of return on these projects is 10 percent, which would be chosen and why?

a. Project B because it has the higher NPV.

b. Project B because it has the higher IRR.

c. Project A because it has the higher NPV.

d. Project A because it has the higher IRR.

e. Neither, because both have IRRs less than the cost of capital.

IRR Answer: c Diff: E

50. The capital budgeting director of Sparrow Corporation is evaluating a project that costs $200,000, is expected to last for 10 years and produce after-tax cash flows, including depreciation, of $44,503 per year. If the firm’s cost of capital is 14 percent and its tax rate is 40 percent, what is the project’s IRR?

a. 8%

b. 14%

c. 18%

d. -5%

e. 12%

IRR Answer: c Diff: E

51. An insurance firm agrees to pay you $3,310 at the end of 20 years if you pay premiums of $100 per year at the end of each year for 20 years. Find the internal rate of return to the nearest whole percentage point.

a. 9%

b. 7%

c. 5%

d. 3%

e. 11%

IRR, payback, and missing cash flow Answer: d Diff: E

52. Oak Furnishings is considering a project that has an up-front cost and a series of positive cash flows. The project’s estimated cash flows are summarized below:

Project

Year Cash Flow

0 ?

1 $500 million

2 300 million

3 400 million

4 600 million

The project has a regular payback of 2.25 years. What is the project’s internal rate of return (IRR)?

a. 23.1%

b. 143.9%

c. 17.7%

d. 33.5%

e. 41.0%

IRR and mutually exclusive projects Answer: d Diff: E

53. A company is analyzing two mutually exclusive projects, S and L, whose cash flows are shown below:

Y

k = 12%

ears 0 1 2 3

| | | |

S -1,100 1,000 350 50

L -1,100 0 300 1,500

The company’s cost of capital is 12 percent, and it can obtain an unlimited amount of capital at that cost. What is the regular IRR (not MIRR) of the better project, that is, the project that the company should choose if it wants to maximize its stock price?

a. 12.00%

b. 15.53%

c. 18.62%

d. 19.08%

e. 20.46%

NPV and IRR Answer: b Diff: E

54. Your company is choosing between the following non-repeatable, equally risky, mutually exclusive projects with the cash flows shown below. Your cost of capital is 10 percent. How much value will your firm sacrifice if it selects the project with the higher IRR?

P

k = 10%

roject S: 0 1 2 3

| | | |

-1,000 500 500 500

P

k = 10%

roject L: 0 1 2 3 4 5

| | | | | |

-2,000 668.76 668.76 668.76 668.76 668.76

a. $243.43

b. $291.70

c. $332.50

d. $481.15

e. $535.13

NPV and IRR Answer: e Diff: E

55. Green Grocers is deciding among two mutually exclusive projects. The two projects have the following cash flows:

Project A Project B

Year Cash Flow Cash Flow

0 -$50,000 -$30,000

1 10,000 6,000

2 15,000 12,000

3 40,000 18,000

4 20,000 12,000

The company’s weighted average cost of capital is 10 percent (WACC = 10%). What is the net present value (NPV) of the project with the highest internal rate of return (IRR)?

a. $ 7,090

b. $ 8,360

c. $11,450

d. $12,510

e. $15,200

NPV and IRR Answer: d Diff: E N

56. Projects X and Y have the following expected net cash flows:

Project X Project Y

Year Cash Flow Cash Flow

0 -$500,000 -$500,000

1 250,000 350,000

2 250,000 350,000

3 250,000

Assume that both projects have a 10 percent cost of capital. What is the net present value (NPV) of the project that has the highest IRR?

a. $ 13,626.35

b. $ 16,959.00

c. $ 62,050.62

d. $107,438.02

e. $121,713.00

NPV, IRR, and payback Answer: d Diff: E

57. Braun Industries is considering an investment project that has the following cash flows:

Year Cash Flow

0 -$1,000

1 400

2 300

3 500

4 400

The company’s WACC is 10 percent. What is the project’s payback, internal rate of return (IRR), and net present value (NPV)?

a. Payback = 2.4, IRR = 10.00%, NPV = $600.

b. Payback = 2.4, IRR = 21.22%, NPV = $260.

c. Payback = 2.6, IRR = 21.22%, NPV = $300.

d. Payback = 2.6, IRR = 21.22%, NPV = $260.

e. Payback = 2.6, IRR = 24.12%, NPV = $300.

Crossover rate Answer: b Diff: E

58. Two projects being considered are mutually exclusive and have the following projected cash flows:

Project A Project B

Year Cash Flow Cash Flow

0 -$50,000 -$ 50,000

1 15,990 0

2 15,990 0

3 15,990 0

4 15,990 0

5 15,990 100,560

At what rate (approximately) do the NPV profiles of Projects A and B cross?

a. 6.5%

b. 11.5%

c. 16.5%

d. 20.0%

e. The NPV profiles of these two projects do not cross.

Crossover rate Answer: d Diff: E

59. Hudson Hotels is considering two mutually exclusive projects, Project A and Project B. The cash flows from the projects are summarized below:

Project A Project B

Year Cash Flow Cash Flow

0 -$100,000 -$200,000

1 25,000 50,000

2 25,000 50,000

3 50,000 80,000

4 50,000 100,000

The two projects have the same risk. At what cost of capital would the two projects have the same net present value (NPV)?

a. 2.86%

b. 13.04%

c. 15.90%

d. 10.03%

e. -24.45%

Crossover rate Answer: a Diff: E

60. Cowher Co. is considering two mutually exclusive projects, Project X and Project Y. The projects are equally risky and have the following expected cash flows:

Project X Project Y

Year Cash Flow Cash Flow

0 -$3,700 million -$3,200 million

1 1,400 million 900 million

2 1,070 million 1,000 million

3 1,125 million 1,135 million

4 700 million 720 million

At what cost of capital would the two projects have the same net present value (NPV)?

a. 8.07%

b. 45.80%

c. 70.39%

d. 6.90%

e. Cannot be determined.

Crossover rate Answer: c Diff: E

61. Heller Airlines is considering two mutually exclusive projects, A and B. The projects have the same risk. Below are the cash flows from each project:

Project A Project B

Year Cash Flow Cash Flow

0 -$2,000 -$1,500

1 700 300

2 700 500

3 1,000 800

4 1,000 1,100

At what cost of capital would the two projects have the same net present value (NPV)?

a. 68.55%

b. 4.51%

c. 26.67%

d. 37.76%

e. 40.00%