Solution to Part a

LAIHO INDUSTRIES
Income Statement
for the period ended December 31, 2008

(in '000 $)
Sales 455,150
EBITDA 68,273
Less: Depreciation and Amortization 7,388
EBIT 60,884
Less: Interest Expense 8,575
EBT 52,309
Less: Income Tax (40%) 20,924
Net Income 31,386

Solution to Part b

LAIHO INDUSTRIES
Statement of Stockholder's Equity
for the period ended December 31, 2008

Capital Stock
Jan 1, 2008, Beginning Balance 90,000.00
Shares Issued during the year 10,000.00
Dec 31, 2008, Ending Balance 100,000.00
Retained Earnings
Jan 1, 2008, Beginning Balance 38,774.00
Net Income after Tax for the year 2008 31,386.00
Less: Dividend declared during 2008 12,554.00
Net Increase during the year 2008 18,831.00
Dec 31, 2008, Ending Balance 57,605.00
Total Stockholder's Equity, December 31, 2008 157,605.00

LAIHO INDUSTRIES
Cash Flow Statement
for the period ended December 31, 2008

A. Cash from Operating Activities

Reatined Earnings during the year 18,831.00
Working Capital Changes
Less; Increase in Accounts Receivables (17,838.00)
Less: Increase in Inventories (3,462.00)
Add: Increase in Accounts Payable 7,652.00
Add: Increase in Accruals 7,821.00
Add: Increase in Notes Payable 2,500.00 (3,327.00)
Cash from Operating Activities 15,504.00
B. Cash from Investing Activities
New Fixed Assets purchased (24,729.00)
Cash used in Investing Activities (24,729.00)
C. Cash from Financing Activities
Long Term Debt raised 12,350.00
Common Stock issued 10,000.00
Cash from Financing Activities 22,350.00
Cash and Cash Equivalents during the period 13,125.00
Cash, Jan 1, 2008, Beginning Balance 89,725.00
Cash, Dec 31, 2008, Ending Balance 102,850.00

Solution to Part c

Calculation of Net Working Capital (NWC)

2008 2007
Current Assets 244,659.00 210,234.00
Less: Current Liabilities 77,955.00 59,982.00
Net Working Capital 166,704.00 150,252.00

FREE CASH FLOW for the year 2008

Net Income 31,386.00

Add: Depreciation and Amortization 7,388.00
Less: Changes in Working Capital (16,452.00)
Less: Capital Expenditure (24,729.00)
Free Cash Flow (2,407.00)

Solution to Part d

There would be not an affect on the corporate tax paid due to the change in the divividend payout ratio. This is because the di
If the dividend payout ratio is increased then the taxpayers will have to pay more of the tax and vice versa.
payout ratio. This is because the dividend is paid out of the net profits after tax.
and vice versa.
 A B C D E F G
1 Solution to Part a
2
3 Data as given in the problem are shown below:
4 Bartman Industries Reynolds Incorporated Winslow 5000
5 Year Stock Price Dividend Stock Price Dividend Includes Divs.
6 2008 $17.250 $1.150 $48.750 $3.000 11,663.98
7 2007 14.750 1.060 52.300 2.900 8,785.70
8 2006 16.500 1.000 48.750 2.750 8,679.98
9 2005 10.750 0.950 57.250 2.500 6,434.03
10 2004 11.375 0.900 60.000 2.250 5,602.28
11 2003 7.625 0.850 55.750 2.000 4,705.97
12
13 We now calculate the rates of return for the two companies and the index:
14
15 Bartman Reynolds Index
16 2008 24.7% -1.1% 32.8%
17 2007 -4.2% 13.2% 1.2%
18 2006 62.8% -10.0% 34.9%
19 2005 2.9% -0.4% 14.8%
20 2004 61.0% 11.7% 19.0%
21
22 Avg Returns 29.4% 2.7% 20.6%
23
24
25 Solution to Part b
26
27 We will use the function wizard to calculate the standard deviations.
28
29 Bartman Reynolds Index
30 Standard deviation of return 31.5% 9.7% 13.8%
31
32 On a stand-alone basis, it would appear that Bartman is the most risky, Reynolds the least risky.
33
34
35 Solution to Part c
36
37 Divide the standard deviation by the average return:
38
39 Bartman Reynolds Index
40 Coefficient of Variation 1.07 3.63 0.67
41
42 Reynolds now looks most risky, because its risk (SD) per unit of return is highest.
43
 A B C D E F G
44
45 Solution to Part d
46
47 It is easiest to make scatter diagrams with from a data set that has the X-axis variable in the left column, so we reformat
48 the returns data calculated above and show it just below.
49
50 Year Index Bartman Reynolds
51 2008 32.8% 24.7% -1.1%
52 2007 1.2% -4.2% 13.2%
53 2006 34.9% 62.8% -10.0%
54 2005 14.8% 2.9% -0.4%
55 2004 19.0% 61.0% 11.7%
56
57 Stock Returns Vs. Index
58
59 70.0%
60 60.0%
61 50.0%
Stocks' Returns

62 40.0%
63 30.0% Bartman
64
20.0% Reynolds
65
10.0%
66
67 0.0%
68 -10.0%0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0%
69 -20.0%
70
Index Returns
71
72
73 To make the graph, we first selected the range with the returns and the column heads, then clicked the chart wizard,
74 then choose the scatter diagram without connected lines. That gave us the data points. We then used the drawing
75 toolbar to make free-hand ("by eye") regression lines, and changed the lines color and weights to match the dots.
76
77 It is clear that Bartman moves with the market and Reynolds moves counter to the market. So, Bartman has a positive
78 beta and Reynolds a negative one.
79
80
81 Solution to Part e
82
83 We can use the data just above the graph to do the regression. Look at the explanation of how to do regressions in the
84 model for this chapter (08model) if need be. But to summarize, click on Tools, Data Analysis, Regression and then
85 follow the menu. We first calculate Bartman's beta, then Reynolds'.
86
87 Bartman's Calculations
88 SUMMARY OUTPUT Bartman's beta = 1.54
89
90 Regression Statistics
91 Multiple R 0.675472263488
92 R Square 0.456262778742
93 Adjusted R Sq 0.275017038322
94 Standard Error 0.26812110913
95 Observations 5
96
 A B C D E F G
97 ANOVA
98 df SS MS F Significance F
99 Regression 1 0.1809711086386 0.180971108638628 2.51737104378583 0.2107898822
100 Residual 3 0.2156667874829 0.071888929160982
101 Total 4 0.3966378961216
102
103 Coefficients Standard Error t Stat P-value Lower 95% Upper 95%
104 Intercept -0.022027654466 0.2327008490699 -0.094660825492065 0.930552527278417 -0.7625863065 0.718531
105 X Variable 1 1.539312157591 0.9701817106539 1.5866225271897 0.210789882182625 -1.5482419394 4.6268663
106
107
108
109 RESIDUAL OUTPUT
110
111 Observation Predicted Y Residuals
112 1 0.482265844851 -0.234808217733
113 2 -0.003279214803 -0.038538967015
114 3 0.515305578413 0.1126013983307
115 4 0.206508385696 -0.177936957124
116 5 0.271153322032 0.3386827435414
117
118
119 Reynolds' Calculations
120 SUMMARY OUTPUT
121
122 Regression Statistics
123 Multiple R 0.797347994083
124 R Square 0.635763823668 Reynolds' beta = -0.56
125 Adjusted R Sq 0.514351764891
126 Standard Error 0.067686718129
127 Observations 5
128
129 ANOVA
130 df SS MS F Significance F
131 Regression 1 0.0239905885892 0.023990588589226 5.23641415910585 0.1061199736
132 Residual 3 0.0137444754332 0.004581491811053
133 Total 4 0.0377350640224
134
135 Coefficients Standard Error t Stat P-value Lower 95% Upper 95%
136 Intercept 0.141962670426 0.0587449336998 2.41659427435455 0.094456724705009 -0.0449901022 0.3289154
137 X Variable 1 -0.560457296567 0.2449207233102 -2.2883212534751 0.106119973577047 -1.3399050788 0.2189905
138
139
140
141 RESIDUAL OUTPUT
142
143 Observation Predicted Y Residuals
144 1 -0.041648541835 0.0311322894449
145 2 0.135136439791 -0.002828747483
146 3 -0.05367817446 -0.046758506762
147 4 0.058753627604 -0.062920294271
148 5 0.03521666918 0.0813752590714
149
150 Note that these betas are consistent with the scatter diagrams we constructed earlier. Reynolds' beta suggests that it
151 is less risky than average in a CAPM sense, whereas Bartman is more risky than average.
152
 A B C D E F G
153
154
155 Solution to Part f
156
157 Market Return = 11.000%
158 Risk-free rate = 6.040%
159
160 Required return = Risk-free rate + Market Risk Premium × Beta
161
162 Bartman:
163 Required return = 6.040% 4.960% 1.539
164 Required return = 13.675%
165
166 Reynolds:
167 Required return = 6.040% 4.960% -0.560
168 Required return = 3.260%
169
170 This suggests that Reynolds' stock is like an insurance policy that has a low expected return, but it will pay off in the
171 event of a market decline. Actually, it is hard to find negative-beta stocks, so we would not be inclined to believe the
172 Reynolds' data.
173
174
175 Solution to Part g
176
177 The beta of a portfolio is simply a weighted average of the betas of the stocks in the portfolio, so this portfolio's beta
178 would be:
179
180 Portfolio beta = 0.49
181
182 Required return on portfolio = Risk-free rate + Market Risk Premium ´ Beta
183 Required return = 6.040% 4.960% 0.489
184 Portfolio required return = 8.468%
185
186
187
188
189 Solution to Part h
190
191 Beta Portfolio Weight
192 Bartman 1.539 25%
193 Stock A 0.769 15%
194 Stock B 0.985 40%
195 Stock C 1.423 20%
196 100%
197 Portfolio Beta = 1.179
198
199 Required return on portfolio = Risk-free rate + Market Risk Premium ´ Beta
200 Required return on portfolio = 6.04% 4.96% 1.179
201 Required return on portfolio = 11.89%
solution to 6-10

I 1= 3%
I2=3+x
r* = 2%
I2 = ?

r3 = r1 +2%

r1 = r* +IP = 2+3 = 5%

Knowing r1 we can now calculate r3 = 5% + 2% = 7%

r3 = r* + IP3
7 = 2 + [3 + ( 3+x) + (3+x)] / 3
21 = 6 + 3 + 2(3+x)
21 = 9 + 2(3+x)
12 = 2(3+x)
2(3+x) = 12 / :2
3+x = 6
x=3

Now we can find the I2 = 3 + x = 3 + 3 = 6%

Solution to Part a

This is as per the first method in which the IP is taken as it is

Real
Risk
Years to Free Kt = k* +
Maturity Rate (k*) IP MRP IP + MRP
1 2% 7% 0.20% 9.2%
2 2% 5% 0.40% 7.4%
3 2% 3% 0.60% 5.6%
4 2% 3% 0.80% 5.8%
5 2% 3% 1.00% 6.0%
10 2% 3% 1.00% 6.0%
20 2% 3% 1.00% 6.0%

Solution to Part b & c

In the second method, the average of the IP has been taken

Real
Risk
Years to Free Kt = k* +
Maturity Rate (k*) IP** MRP IP + MRP
1 2% 7.00% 0.20% 9.2%
2 2% 5.00% 0.40% 7.4%
3 2% 5.00% 0.60% 7.6%
4 2% 4.50% 0.80% 7.3%
 5 2% 4.20% 1.00% 7.2%
10 2% 3.60% 1.00% 6.6%
20 2% 3.30% 1.00% 6.3%

** The computation of the inflation premium (IP) is as follows:

Expecte Average
Years to d Expected
Maturity Inflation Inflation
1 7% 7.00%
2 5% 5.00%
3 3% 5.00%
4 3% 4.50%
5 3% 4.20%
10 3% 3.60%
20 3% 3.30%

The default risk premium for BBB-rated bonds is higher than the DRP for AAA-rated bonds
the underlying concept here is called duration. the 20 year bond will have a higher duration than the 1 year bill, and will be mo
hard to call any treasury instrument "risky" though - they are the definition of "risk-free" after all (and it's actually unconstitution
1 year bill, and will be more sensitive to interest rate movements, so they are more volatile.
t's actually unconstitutional to say that there is any default risk for treasuries).
Response Details:
Par Value of the Bond $1,000
Number of Years to Maturity 10 years
Annual Coupon Rate 0.11
Current Price of the Bond $1,175
Call Price of the Bond $1,090

Calculating YTM:
(Using Ms-Excel "RATE" Function):

Number of Periods 10

Annual Coupon Payment [$1,000 * 11%] -110

Present Value of the Bond 1175

Future Value (or) Par Value of the Bond -1000

Rate of Return on the Bond (RATE) 8.35%

Calculating YTC (Yield To Call)

(Using Ms-Excel "RATE" Function):

Number of Periods 5

Annual Coupon Payment [$1,000 * 11%] -110

Present Value of the Bond 1175

Future Value (or) Par Value of the Bond -1090

Rate of Return on the Bond (RATE) 8.13%

Yield to Maturity on the Bond (YTM) 8.35%

Yield to Call on the Bond       (YTC) 8.13%

if the Bond is a Premium Bond  YTM>YTC

if the Bond is a Discount Bond YTM<YTC

Note: Here, the Bond is a Premium Bond. Thus, the Yield to Maturity (YTM) is greater than the Yield to Call (YTC).
eld to Call (YTC).
Total Fund Requirement 1,000,000.00
Basic Earning Power Ratio 20%

100% Equity 50% Equity, 50% Debt

Earnings 200,000.00 200,000.00
Less: Interest - 40,000.00
PBT 200,000.00 160,000.00
Less: Tax (40%) 80,000.00 64,000.00
PAT 120,000.00 96,000.00

Equity 1,000,000.00 500,000.00

ROE 12.00% 19.20%

The ROE of the firm with 50% debt is more due to the leverage that is being provided by the debt and hence the benefit is the
and hence the benefit is the maximization of return on equity
Debt Ratio 50%
Current Ratio 1.8x
Total Assets Turnover 1.5x
Days Sales Outstanding 36.5 days
Gross Profit Margin 25%
Inventory Turnover 5x

Total Assets Turnover Ratio = Sales / Total Assets

therefore, Sales = Total Assets x Total assets turnover ratio
Sales =300000*1.5
450,000.00

Sinnce GP ratio is 25%, therefore

Gross Profit =450000*25%
112,500.00

Cost of Goods Sold = Sales - Gross Profit

COGS =450000-112500
337,500.00

Days Sales Outstanding = (365 x Accounts Receivables) / Sales

This means that Accounts Receivables = (DSO x Sales)/365
Accounts Receivables =(36.5*450000)/365
45,000.00

We know that Inventory Turnover Ratio - Cost of Goods Sold / Average Inventory
this means that Inventory = COGS / Inventory Turnover Ratio
Inventory =337500/5
67,500.00

Debt Ratio = Total Debt / Total Assets

Therefore, Total Debt = Debt Ratio x Total Assets

Total Debt =300000*50%

150,000.00

Current Liabilities = Total Debt - Long Term Debt

=150000-60000
90,000.00

Current Ratio = Current Assets / Current Liabilities

Therefore Current Assets = Current Ratio x Current Liabilities

Current Assets =1.8*90000

162,000.00

Cash = Current Assets - Inventories - Accounts Receivable

=162000-67500-45000
49,500.00

Fixed Assets = Total Assets - Current Assets

 =300000-162000
138,000.00

Common Stock = Total Liabilities & Equity - Total Debt - Retained Earnings
=300000-150000-97500
52,500.00

BALANCE SHEET
Cash 49,500.00 Accounts Payable 90,000.00
Accounts Receivable 45,000.00 Long Term Debt 60,000.00
Inventories 67,500.00 Common Stock 52,500.00
Fixed Assets 138,000.00 Retained Earnings 97,500.00
Total Assets 300,000.00 Total Liabilities & Equity 300,000.00

Sales 450,000.00 Cost of Goods Sold 337,500.00

Calculating the Present Values of the cash flows

Year Cashflow PVF @ 8% PV

1 300 0.92592593 277.7778
2 300 0.85733882 257.2016
3 300 0.79383224 238.1497
4 200 0.73502985 147.006
5 300 0.6805832 204.175
6 500 0.63016963 315.0848
1439.395

Calculating the Future Values of the cash flows

Year Cashflow FVF @ 8% PV

1 300 1.58687432 476.0623
2 300 1.46932808 440.7984
3 300 1.36048896 408.1467
4 200 1.259712 251.9424
5 300 1.1664 349.92
6 500 1.08 540
2466.87
Nominal Rate of Interest 6%
Compounding Frequency monthly

EFF =(1+(0.06/12))^12-1
6.17%

APR charged to the customers =6.2%+2%

8.2%
Solution to Part a

Most Recent annual dividend (Do) 1.75

Expected dividend for

2009 =1.75*1.15^1 2.01

2010 =1.75*1.15^2 2.31
2011 =1.75*1.15^3 2.66
2012 =1.75*1.15^4 3.06
2013 =1.75*1.15^5 3.52

Solution to Part b

Year Expected Dividend PV of the Dividend

2009 2.01 1.80
2010 2.31 1.85
2011 2.66 1.89
2012 3.06 1.95
2013 3.52 2.00
2014 3.70
9.48

Price of the stock after 2013 =3.7/(.12-0.05)

52.86
PV of the price of the stock 29.99

Therefore Po = PV of the dividends from 2009 to 2013 + PV of the price of share after 2013
=9.48+29.99
39.47

Solution to Part c

Dividend Yield =2.01/39.47

5.1%

Capital gains yield

Po 39.47
Pi 39.47

Capital gains yield 0 (this is becaise both the current price and the price after one year are assumed to be same)

Total Return =5.1%+0%

5.100%

Solution to Part d

in the early stages of the lives of the stock, the tax implications are not that much due to the fact that the dividends are not con
and its impact is not seen in the actual price of the shares. As the stock matures, the incomes of the company consolidates an
company gains foot on the same. This results in more of the capital gains which has got the higher tax rate than the dividends

the stock of WME the maturity period is after the year 2013 when the earnings of the company becomes stable.

Solution to Part e

The price of the stock will decline than what has been calculated above.

Solution to Part f

Due to the high required rate of return the present value of the stocks would decline and this would also impact the various yie
are assumed to be same)

the dividends are not consolidated

company consolidates and the
ax rate than the dividends income.

lso impact the various yields negatively as well.

Solution to Part a

Cost of Debt 10%

Tax Rate 30%
After Tax Cost of Debt =10%*(1-30%)
7.00%

Cost of Preferred Stock

Constant dividend on Preferred Stock 5.00

Price of the Preferred stock 49.00

Kp =5/49
10.20%

Cost of Equity

D1 3.50
g 6%
Po 36.00

Ke =(3.5/36)+6%
15.72%

Solution to Part b

Type Weights Cost Product

Debt 15% 7.00% 1.0500%
Preferred 10% 10.20% 1.0204%
Equity 75% 15.72% 11.7917%
13.86% WACC

Solution to Part c

Adam should accept only Project 1 & 2

Project Risk WACC Adjustment Risk adjusted WACC Rate of Return
A HIGH 10% 2% 12% 14%
B HIGH 10% 2% 12% 11.50%
C LOW 10% -2% 8% 9.50%
D AVERAGE 10% 10% 9%
E HIGH 10% 2% 12% 12.50%
F AVERAGE 10% 10% 12.50%
G LOW 10% -2% 8% 7%
H LOW 10% -2% 8% 11.50%

Solution to Part a

Project Risk WACC Adjustment Risk adjusted WACC Rate of Return

A HIGH 10% 2% 12% 14%
B HIGH 10% 2% 12% 11.50%
C LOW 10% -2% 8% 9.50%
D AVERAGE 10% 10% 9%
E HIGH 10% 2% 12% 12.50%
F AVERAGE 10% 10% 12.50%
G LOW 10% -2% 8% 7%
H LOW 10% -2% 8% 11.50%

Solution to Part b

Zeige can accept only 5 projects whhicha re listed as below and whose investments are also mentioned

Project Investment Risk adjusted WACC Rate of Return Excess Return

(in million $)
A 4 12% 14.00% 2.00%
C 3 8% 9.50% 1.50%
E 6 12% 12.5% 0.50%
F 5 10% 12.50% 2.50%
H 3 8% 11.50% 3.50%

Ranking on the basis of the maximum excess returns provided, projects H,F and A shall be selected and the total capital budg
$(3+5+4) million = $12 million and this amount is with in the budget constraint.

Solution to Part c

Even in case the company requires the additional fund for further projects, it can now select only Project C because it is now w
with additional 1% increase in the cost of capital.
 Decision
ACCEPT
REJECT
ACCEPT
REJECT
ACCEPT
ACCEPT
REJECT
ACCEPT

ed and the total capital budget required for them is

Project C because it is now with buffer of compensating

Solution to Part a

Cashflow Present Value

Year PVF @ 10% Project A Project B Project A Project B
0 1 (30.00) (30.00) (30.00) (30.00)
1 0.90909090909 5.00 20.00 4.55 18.18
2 0.82644628099 10.00 10.00 8.26 8.26
3 0.7513148009 15.00 8.00 11.27 6.01
4 0.68301345537 20.00 6.00 13.66 4.10

NPV 7.74 6.55

IRR 19.19% 22.52%
MIRR 44.28% 64.93%
Payback (years) 3.00 2.00
Discounted Payback (years) 3.43 2.59

Solution to Part b

If the projects are independent, then according to all the criteria, both A & B can be selected because the NPV is p
IRR and MIRR is also more than the cost of capital used. But Project B has an edge over Project in all aspects exc

Solution to Part c

In case the projects are mutually exclusive, then the general criteria is to evaluate the projects on the basis of NPV
is better then it must be selected but Project B has better IRR which means that it is adding more value to the comp

Solution to Part d

NPV of
Discount Rate Project A Project B
0% 20.00 14.00 25.00
2% 17.13 12.30
5% 13.24 9.96 20.00
10% 7.74 6.55
12% 5.82 5.34 15.00
15% 3.21 3.64
NPV

20% (0.56) 1.13 10.00

25% (3.73) (1.05)
5.00
From the chart we can see that the Project A's line is touching the X-axis at
19.19% (as calculated above) and Project B's line at 22.52% (also
-
calculated above)
0% 5% 10%
(5.00)
Di
Solution to Part e

Discount Rate Project A Project B

5% 13.24 9.96
15% 3.21 3.64
In case the WACC is 5%, then also on the basis of NPV, project A should be selected as it will be having higher NPV than pro
But in case the WACC is 15%, then the Project B should be selected.

Solution to Part f

Year Cash Flow Differential

0 -
1 (15.00)
2 -
3 7.00
4 14.00

Crossover Rate 13.5254%

A crossover rate is the discount rate at which the NPV profiles of two projects intersect
and produce identical NPVs. Knowing the crossover rate when analyzing mutually
exclusive projects permits identifying discount rates that result in conflicting versus
consistent rankings between NPV and IRR. If the discount rate is below the crossover
rate, conflicts occur between the rankings of the NPV and IRR of mutually exclusive
projects. If the discount rate is above the crossover rate, the NPV and IRR yield the
same ranking and no conflict in the ranking occurs. Thus, the presence of conflicting
rankings of mutually exclusive projects depends on the discount rate.

Solution to Part g

Yes, the conflict is possible in two scenarios.

1. When there is substantial difference in the size of the projects.
2. When there is timing difference between the two projects.

Solution to Part h

In both the case Project B is better

Solution to Part i

The payback which is minimum should only be selected for the criteria. It also depends on how the management w
Yes, it is more or less arbitary. No this is not in case of NPV or IRR because these methods are based on the time

Solution to Part j
 The modified internal rate of return (MIRR) is the discount rate that causes a project's cost (or cash outflows) to eq
The MIRR has an important advantage over regular IRR. MIRR assumes that cash flows from all the firm’s projects
assumes that cash flows from each project are reinvested at the project’s own IRR. Since reinvestment at the cost
is a better indicator of a project’s true profitability

Solution to Part k

On a purely theoretical basis, the NPV method is the superior approach when evaluating mutually exclusive projec
There are several reasons for NPV being the preferred approach when evaluation capital investments. Of these fou
the goal of wealth creation. This is because NPV measures the amount by which a capital investment creates weal
firm reinvests any intermediate cash inflows generated by an investment at its cost of capital. Using IRR implicitly a
Compared with the IRR, the cost of capital tends to be a more conservative and realistic rate at which the firm can
avoids potential problems that may cause a project with non-conventional cash flows to have zero or more than on
 be selected because the NPV is positive in both the cases and
edge over Project in all aspects except for NPV.

te the projects on the basis of NPV and IRR. Since the NPV of Project A
it is adding more value to the company’s profits.

NPV PROFILE
25.00

20.00

15.00

Project A
10.00
Project B
5.00

-
0% 5% 10% 15% 20% 25% 30%
(5.00)
Discount Rates
will be having higher NPV than project B

jects intersect

epends on how the management wants to recover the money.

ese methods are based on the time value of money.
oject's cost (or cash outflows) to equal the 'present value of the project's terminal value.
ash flows from all the firm’s projects are reinvested at the cost of capital, while regular IRR
RR. Since reinvestment at the cost of capital is generally more correct, the MIRR

valuating mutually exclusive projects of differing size or differing cash flow patterns.
on capital investments. Of these four techniques, using NPV is the most consistent with achieving
h a capital investment creates wealth. In addition, using NPV implicitly assumes that the
ost of capital. Using IRR implicitly assumes reinvesting intermediate cash inflows at the IRR.
realistic rate at which the firm can reinvest intermediate cash inflows. Finally, the NPV approach
flows to have zero or more than one IRR.
Part e is correct

This is because all other factors contribute to the size of the BEP