2. Nast Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher MIRR rather than the one with the higher NPV, how much value will be forgone? Note that under some conditions choosing projects on the basis of the MIRR will cause $0.00 value to be lost. WACC: 8.00% 1 2 3 4 CFs -$1,100 $375 $375 $375 $375 CFL -$2,200 $725 $725 $725 $725 a. $50.95 b. $66.95 c. $59.24 d. $47.40 e. $72.28

2. Nast Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher MIRR rather than the one with the higher NPV, how much value will be forgone? Note that under some conditions choosing projects on the basis of the MIRR will cause $0.00 value to be lost. WACC: 8.00% 1 2 3 4 CFs -$1,100 $375 $375 $375 $375 CFL -$2,200 $725 $725 $725 $725 a. $50.95 b. $66.95 c. $59.24 d. $47.40 e. $72.28

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Project A and B have a cost of OMR (700). Each project generates cash flows as seen in the below table, According to the payback period method and in the line of risk and liquidity preference, answer the following:- (Hint:- Your answer must be not random.) which is the project you will select? Justfy your decision. End-of- Year Cash Flow Project 1 2 3 A 500 300 100 B 400 450 100
Newtown Corp. has to choose between two mutually exclusive projects. If it chooses project A, Newtown Corp. will have the opportunity to make a similar investment in three years. However, if it chooses project B, it will not have the opportunity to make a second investment. The following table lists the cash flows for these projects. If the firm uses the replacement chain (common life) approach, what will be the difference between the net present value (NPV) of project A and project B, assuming that both projects have a weighted average cost of capital of 12%? Cash Flow Project A Project B Year 0: –$15,000 Year 0: –$40,000 Year 1: 9,000 Year 1: 8,000 Year 2: 15,000 Year 2: 15,000 Year 3: 14,000 Year 3: 14,000 Year 4: 13,000 Year 5: 12,000 Year 6: 11,000 $13,512 $11,923 $15,897 $12,718 $10,333 Newtown Corp. is considering a five-year project that has a weighted average cost of capital of…
XYZ Corporation evaluates two projects. Projects x and y; the below table shows their cash flows. These projects are mutually exclusive, equally risky and are not repeatable. If the decision is made by choosing the Project with the higher IRR, how much value will be forgone? Wacc %8 0 1 2 3 4 CF(X) ($1,050) $675 $650 CF(Y) ($1,050) $360 $360 $360 $360 a. IRR of Project X: %.......... b. IRR of Project Y: %.......... c. NPV of Project X: $............ d. NPV of Project Y: $............ e. The Value forgone: $..............
Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. The lower the WACC used to calculate a project's NPV, the lower the calculated NPV will be. If a project's NPV is less than zero, then its IRR must be less than the WACC. If a project's NPV is greater than zero, then its IRR must be less than zero. The NPV of a relatively low-risk project should be found using a relatively high WACC. A project's NPV is found by compounding the cash inflows at the IRR to find the terminal value (TV), then discounting the TV at the WACC. 000o
Basic NPV methods tell us that the value of a project today is NPV0. Time value of money issues also lead us to believe that if we choose not to do the project that it will be worth NPV1 one period from now, such that NPV0 > NPV1. Why then do we see some firms choosing to defer taking on a project?
XYZ Corp. is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's IRR can be less than the WACC or negative, in both cases it will be rejected. Year 0 1 2 3 Cash flows -$1,000 $325 $425 $525
2. Consider the model of Moral Hazard where firms choose between investing one unit of output in a less risky or more risky project. The safer project yields with probability and zero otherwise while the risky project yields 2 with probability and zero otherwise i.e. TG = G = TB B = 2. Suppose firms finance their investment by borrowing 1 unit from a the fiinancial market at interest rate R. The financial market is risk neutral and requires an expected rate of return equal to the risk free rate which is assumed to be zero. Will there be an equilibrium with lending to firms from the financial market A. Yes B. No C. Not enough information D. None of A-C
4. Modified internal rate of return (MIRR) The IRR evaluation method assumes that cash flows from the project are reinvested at the same rate equal to the IRR However, in reality the reinvested cash flows may not necessarily generate a return equal to the IRR. Thus, the modified IRR approach makes a more reasonable assumption other than the project's IRR Consider the following situation: Cold Goose Metal Works Inc. is analyzing a project that requires an initial investment of $600,000. The project's expected cash flows are: Year Year 1 Year 2 Year 3 Year 4 Cold Goose Metal Works Inc.'s WACC is 7%, and the project has the same risk as the firm's average project. Calculate this project's modified internal rate of return (MIRR): 17.50% 14.00% Cash Flow $350,000 -100,000 450,000 400,000 19.25%
39. Deyland Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher MIRR rather than the one with the higher NPV, how much value will be forgone? Note that under some conditions choosing projects on the basis of the MIRR will cause $0.00 value to be lost. WACC = 9%. Year 0 a. $24.71 b. $27.46 c. $30.51 d. $33.90 e. $37.29 1 2 3 4 CF, -$1,100 $375 $375 $375 $375 CF₂ $2,200 $725 $725 $725 $725
Nast Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher MIRR rather than the one with the higher NPV, how much value will be forgone? Note that under some conditions choosing projects on the basis of the MIRR will cause $0.00 value to be lost. WACC: 9.25% CFS CFL 1 2 3 4 -$1,200 $405 $405 $405 $405 -$2,400 $780 $780 $780 $780 0 a. $0.00 b. $210.59 c. $120.02 d. $8.26 e. $7.56
Current Design Co. is considering two mutually exclusive, equally risky, and not repeatable projects, S and L. Their cash flows are shown below. The CEO believes the IRR is the best selection criterion, while the CFO advocates the NPV. If the decision is made by choosing the project with the higher IRR rather than the one with the higher NPV, how much, if any, value will be forgone, i.e., what's the chosen NPV versus the maximum possible NPV? Note that (1) "true value" is measured by NPV, and (2) under some conditions the choice of IRR vs. NPV will have no effect on the value gained or lost. r: 8% Year CFS CFL $149.21 $130.31 $121.42 $101.96 $98.10 0 -$1,200 -$2,800 $700 $600 2 $600 $735 3 $150 $700 4 $110 $1,800
Assume a project has normal cash flows. All else equal, which of the following statements is correct? A project's regular payback increases as the WACC declines. OA project's IRR increases as the WACC declines. A project's NPV declines as the WACC declines. 4 A project's discounted payback increases as the WACC declines. O A project's MIRR is unaffected by changes in the WACC. None of the above statement.

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