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Ranking conflicts Answer: a Diff: E

MIRR Answer: d Diff: M

81. 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?

a. 15.0%

b. 14.0%

c. 12.0%

d. 16.0%

e. 17.0%

MIRR Answer: e Diff: M

82. Martin Manufacturers is considering a five-year investment that costs $100,000. The investment will produce cash flows of $25,000 each year for the first two years (t = 1 and t = 2), $50,000 a year for each of the remaining three years (t = 3, t = 4, and t = 5). The company has a weighted average cost of capital of 12 percent. What is the MIRR of the investment?

a. 12.10%

b. 14.33%

c. 16.00%

d. 18.25%

e. 19.45%

MIRR and CAPM Answer: d Diff: M R

83. Below are the returns of Nulook Cosmetics and “the market” over a three-year period:

Year Nulook Market

1 9% 6%

2 15 10

3 36 24

Nulook finances internally using only retained earnings, and it uses the Capital Asset Pricing Model with an historical beta to determine its cost of equity. Currently, the risk-free rate is 7 percent, and the estimated market risk premium is 6 percent. Nulook is evaluating a project that has a cost today of $2,028 and will provide estimated cash inflows of $1,000 at the end of the next 3 years. What is this project’s MIRR?

a. 12.4%

b. 16.0%

c. 17.5%

d. 20.0%

e. 22.9%

MIRR and missing cash flow Answer: d Diff: M

84. Belanger Construction is considering the following project. The project has an up-front cost and will also generate the following subsequent cash flows:

Project

Year Cash Flow

0 ?

1 $400

2 500

3 200

The project’s payback is 1.5 years, and it has a weighted average cost of capital of 10 percent. What is the project’s modified internal rate of return (MIRR)?

a. 10.00%

b. 19.65%

c. 21.54%

d. 23.82%

e. 14.75%

MIRR, payback, and missing cash flow Answer: d Diff: M

85. Tyrell Corporation is considering a project with the following cash flows (in millions of dollars):

Project

Year Cash Flow

0 ?

1 $1.0

2 1.5

3 2.0

4 2.5

The project has a regular payback period of exactly two years. The project’s cost of capital is 12 percent. What is the project’s modified internal rate of return (MIRR)?

a. 12.50%

b. 28.54%

c. 15.57%

d. 33.86%

e. 38.12%

MIRR and IRR Answer: e Diff: M

86. Jones Company’s new truck has a cost of $20,000, and it will produce end-of-year net cash inflows of $7,000 per year for 5 years. The cost of capital for an average-risk project like the truck is 8 percent. What is the sum of the project’s IRR and its MIRR?

a. 15.48%

b. 18.75%

c. 26.11%

d. 34.23%

e. 37.59%

Mutually exclusive projects Answer: b Diff: M

87. Two projects being considered by a firm are mutually exclusive and have the following projected cash flows:

Project A Project B

Year Cash Flow Cash Flow

0 -$100,000 -$100,000

1 39,500 0

2 39,500 0

3 39,500 133,000

Based only on the information given, which of the two projects would be preferred, and why?

a. Project A, because it has a shorter payback period.

b. Project B, because it has a higher IRR.

c. Indifferent, because the projects have equal IRRs.

d. Include both in the capital budget, since the sum of the cash inflows exceeds the initial investment in both cases.

e. Choose neither, since their NPVs are negative.

Before-tax cash flows Answer: b Diff: M

88. Scott Corporation’s new project calls for an investment of $10,000. It has an estimated life of 10 years and an IRR of 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.)

a. $1,993

b. $3,321

c. $1,500

d. $4,983

e. $5,019

Crossover rate Answer: b Diff: M

89. McCarver Inc. is considering the following mutually exclusive projects:

Project A Project B

Year Cash Flow Cash Flow

0 -$5,000 -$5,000

1 200 3,000

2 800 3,000

3 3,000 800

4 5,000 200

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

a. 15.68%

b. 16.15%

c. 16.25%

d. 17.72%

e. 17.80%

Crossover rate Answer: b Diff: M

90. Martin Fillmore is a big football star who has been offered contracts by two different teams. The payments (in millions of dollars) he receives under the two contracts are listed below:

Team A Team B

Year Cash Flow Cash Flow

0 $8.0 $2.5

1 4.0 4.0

2 4.0 4.0

3 4.0 8.0

4 4.0 8.0

Fillmore is committed to accepting the contract that provides him with the highest net present value (NPV). At what discount rate would he be indifferent between the two contracts?

a. 10.85%

b. 11.35%

c. 16.49%

d. 19.67%

e. 21.03%

Crossover rate Answer: b Diff: M

91. Shelby Inc. is considering two projects that have the following cash flows:

Project 1 Project 2

Year Cash Flow Cash Flow

0 -$2,000 -$1,900

1 500 1,100

2 700 900

3 800 800

4 1,000 600

5 1,100 400

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

a. 4.73%

b. 5.85%

c. 5.98%

d. 6.40%

e. 6.70%

Crossover rate Answer: d Diff: M

92. Jackson Jets is considering two mutually exclusive projects. The projects have the following cash flows:

Project A Project B

Year Cash Flow Cash Flow

0 -$10,000 -$8,000

1 1,000 7,000

2 2,000 1,000

3 6,000 1,000

4 6,000 1,000

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

a. 11.20%

b. 12.26%

c. 12.84%

d. 13.03%

e. 14.15%

Crossover rate Answer: c Diff: M

93. Midway Motors is considering two mutually exclusive projects, Project A and Project B. The projects are of equal risk and have the following cash flows:

Project A Project B

Year Cash Flow Cash Flow

0 -$100,000 -$100,000

1 40,000 30,000

2 25,000 15,000

3 70,000 80,000

4 40,000 55,000

At what WACC would the two projects have the same net present value (NPV)?

  1. 10.33%

  2. 13.95%

  3. 11.21%

  4. 25.11%

  5. 14.49%

Crossover rate Answer: d Diff: M

94. Robinson Robotics is considering two mutually exclusive projects, Project A and Project B. The projects have the following cash flows:

Project A Project B

Year Cash Flow Cash Flow

0 -$200 -$300

1 20 90

2 30 70

3 40 60

4 50 50

5 60 40

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

a. 12.69%

b. 8.45%

c. 10.32%

d. 9.32%

e. -47.96%

Crossover rate Answer: b Diff: M

95. Turner Airlines is considering two mutually exclusive projects, Project A and Project B. The projects have the following cash flows:

Project A Project B

Year Cash Flow Cash Flow

0 -$100,000 -$190,000

1 30,000 30,000

2 35,000 35,000

3 40,000 100,000

4 40,000 100,000

The two projects are equally risky. At what weighted average cost of capital would the two projects have the same net present value (NPV)?

a. 3.93%

b. 8.59%

c. 13.34%

d. 16.37%

e. 17.67%

Crossover rate Answer: b Diff: M

96. Unitas Department Stores is considering the following mutually exclusive projects:

Project 1 Project 2

Year Cash Flow Cash Flow

0 -$215 million -$270 million

1 20 million 70 million

2 70 million 100 million

3 90 million 110 million

4 70 million 30 million

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

a. 1.10%

b. 19.36%

c. 58.25%

d. 5.85%

e. 40.47%