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    15 views9 pages

    CH 10 Probset Solutions

    Uploaded by

    uyjghuikj yuuu
    cb

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
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    of 9
    CORPPORATF FINANCE ‘Chapter 10 —Th of Capital Bs 1, Assumea project has a normal cashflows (i.e. the inital cash flow is negative, and all ‘other cashflows are positive). Which of the follow lg statements is most corect? 4. Allelse equal, a project's IRR increases as the cost of capital declines. |b Ail else equal, a project's NPV increases as the cost of capital declines. ©. All else equal, a projects MIRR is unaffected by changes inthe cos of capital, 4. Answers a and b are correct. Answers band ¢ are correct. 2. Which ofthe following statements is mest correct? & Ia project’s intemal rate of retum (IRR) exceeds the cost of capital, then the | poject’s net present value (NPV) must be positive If Project A has a higher IRR than Project B, then Project A must also have a higher NPV. 6. The IRR calculation implicitly assumes that all cash flows are reinvested ata rate of| retura equal to the cost of eapital 4. Answers a and c are corect, ce None of the answers above is core. 3. Project A has an IRR of 15 percent. Project B has an IRR of 18 percent. Both projects have thesame risk. Which ofthe following statements is most correct?” 2 Ifthe WACC is 10 percent, both projects wl have a postive NP, andthe NPV of Project B will exceed the NPV of Project A. (Ifthe WACC ir15 pret, the NV’ of Projet B wl exceed the NPV of Projet A. the WACE ile! han 18 percent, Proje wil avs hie stoner ee than Poet A 4 Ihe WAC is gree tan 18 percent, Proje wl avays ave shor payback Project A. Ihe WACC increases, the IRR of bth projects wil desi 4 Two mually exclusive projects each havea cost of $10,000. The tot, undscounted cash flows from Project L are $15,000, while the undiscounted cash flows from Project S total $13,000. Their NPV profiles cross ata discount rate of 10 percent. Which ofthe following statements best describes this situation? @& The NPV and IRR methods will select the same project if the cost of epital is greater ‘than 10 percent; for example, 18 percent ». The NPV and IRR methods will select the same project if the eost of capital is ess ‘han |0 percent. For exemple, 8 percent. ©. Todetermine if a ranking conilit will occur between the two projecs the cost of capitel is needed as well as an additional piece of information, ._ProjettL should be selected at any cost of capital, because it has a higher IRR. ©. Project S should be selected at any cost of capital, becais it has a higher IRR. Which of the folowing is most correct? The NPV and IRR rules wil always lead to the same decision in choosing between mutually exclusive projects, unless one or beth ofthe projecis are “non-normal” in the sense of having only one change of sign inthe cash flow stream, ‘The modified Intemal Rate of Retum (MIRR) compounds cash outfiows at the cost of capital Conflicts between NPV and IRR rules arise in choosing between two mutually ‘exclusive projecs (that each have normal cashflows) when the cost of eapital {Skezade the eeasnver point (that i, the point at which NPV profiles eros) 4. ‘The discounted payback method overcomes the prablems thatthe payback method thas with eash flows occurring after the payback perio. ©. None of the statements above is correct. A company estimates that its weighted average cost of capital (WACC) is 10 pereent. ‘Which ofthe following independent projects should the company accept? Project A requires an up-front expenditure of $1,000,000 and generates a net present value of $3.00. b, Project B has a modified intemal rate of return of 9.5 percent, Project C requires an up-front expenditure of $1,000,000 and generates a positive internal rate of return of 9.7 percent. 4. Project D has an internal rate of return of 9.5 percent fe, None of the projects above should be accep ‘You are conside-ing the purchase of an investment that would pay you $5,000 per year for Years 1-5, $3,000 per year for Years 6-8, and $2,000 per year for Years 9 and 10. If You require a'14 percent rate of return, and the eash flows occur atthe end of each year, then how much should you be willing to pay Tor this investment? a. $15,819.27 b. $21,937.36 e $52,415.85 4. $38,000.00 e 52,815.71 Alyeska Salmon Ine, a large salmon canning firm operating in Valdex, Alaska, ‘automated production line project i is considering. ‘The project has acost of $375,000 ‘and is expected to provide after-iax annual cashflows 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 est of capital forthe firm at 12 Percent, What is the projects MIRR? ", thas seen annual returns of 19%, -3%6, 20%, and 16% Two projects being considered by a firm are mutually exclusive and have the following projected cash flows: Year Project A CashFlow Project B Cash Flow o ($100,000) ($100,000) 1 39.500 ° 2 39,500 ° 3 39,500 133,000 Based on only the information given, which ofthe foliowing projects would be preferred, and why? Projet A ecard b. Project 8, because thas a higher IRR. Indifferent, because the projets have equal IRR. 4 Include both in the capital budge, sinc the sum ofthe cash inflows exceeds the inal investment in both cases E, Choose nether, since theit NPVs are negative. Scotts 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 slstributed and the tax rat is 40 percent, what isthe annual before-tax cash flow each year? (Assume depreciation isa negligible amount.) a. $1,993 b S321 e $1300 di $4483 $5,019 World Wide Pants In. has been in business four years. Over those four yeers, the market Over the same time frame, Treasuries average a 6.0% return. WorlcWide finances only with equity from retained earings; has a Beta of 1.31, and it uses the CAPM to estimate its cost of capital. WorldWide is considering (wo altemative trucks. Truck $ hes @ cost of $12,000 and is expected to produce cashflows of $4,300 per year for four years. Truck L has a cost of $20,000 and is expected to produce cash flows of $7,500 per year for 4 years. By how much would World Wide's value rise ifit buys the ‘biter truck, and what is the MIRR of the better truck? Ch 10 Probset Cap Budgeting a A 5 ‘ & Xi 1 Cote ¢ee8tST or < as: TRRowace rave tk shy + Vise: 5 4% ion: ase a Pwiac, ‘atte to ist of iy Tr, sept Pais i rece Ry Reet “L” fon wl Ae av ek ote Wh, be eke “s" greater wey, Accept "8" from U% A WE to THRs ble gtectee Nev” \H Bolo ee Fi = CH IO Ct bsveGmr un AIRE Pv odflas vs FViaflowe PMTs = 13,306 N= PV (25 oy c= 13% 401, C41 3019 c_19 i. ane PRB eq Cuely a PA tua ee < /oooy> ae D450 iB ; 412 y aed Be ay 31,500 ad YY aq 500 5 a ke a oe a Pasbok 2.53.g° cen 7" “ 8.S59 RIT Trib = ‘Ci00, 600 5 oO o 133,009 Us DRRG.919% © Ne lo TAR 1SR= TAT = #/999,59 Alta = Sha(t-t) #1999.592 X(I+.4) 1992.59 = _.6x x= Ol Tee = B30 57 CRIS PRBIET Truck 5 [fo Frevc eo - th ce ay THME CFs ° <13,.0> a ay “ aa 1 750 . seo ? ase ye ime . 00 , oe 8 ‘ ” neve? 4

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