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Corporate Fin Focused Approach

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter10: The Basics Of Capital Budgeting: Evaluating Cash Flows

Section10.4: Internal Rate Of Return (irr)

Problem 2ST

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Consider the following cash flows: CO C1 C2 C3 C4 -
$30 +$ 26 +$ 26 +$26-$51
a. Which two of the following rates are the IRRs of this
project? 2.5% 11.6% 14.3% 23.2% 40.0%
d. What is project NPV if the discount rates are 9%,
18%, and 35%?

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Consider projects A and B with the following cash flows: C0 C1 C2 C3 A − $ 27 + $ 16 + $ 16 + $ 16 B − 52 + 27 + 27 + 27 a-1. What is the NPV of each project if the discount rate is 10%? (Do not round intermediate calculations. Round your answers to 2 decimal places.) a-2. Which project has the higher NPV? b-1. What is the profitability index of each project? (Do not round intermediate calculations. Round your answers to 2 decimal places.) b-2. Which project has the higher profitability index? c. Which project is most attractive to a firm that can raise an unlimited amount of funds to pay for its investment projects? d. Which project is most attractive to a firm that is limited in the funds it can raise?
11. IRR rule (S5.3) Consider the following two mutually exclusive projects: Cash flows ($) Project A B Co -50 -50 C₁ +60 0 C₂ +60 0 0 +140 Page 142 a. Calculate the NPV of each project for discount rates of 0%, 10%, and 20%. Plot these on a graph with NPV on the vertical axis and discount rate on the horizontal axis. b. What is the approximate IRR for each project? c. In what circumstances should the company accept project A? d. Calculate the NPV of the incremental investment (B – A) for discount rates of 0%, 10%, and 20%. Plot these on your graph. Show that the circumstances in which you would accept A are also those in which the IRR on the incremental investment is less than the opportunity cost of capital.
Consider the following two mutually exclusive projects: Year Cash Flow (X) Cash Flow (Y) 0 -24,063 -24,063 1 10,320 12,063 2 10,900 9,360 3 10,800 10,400 Sketch the NPV profiles for X and Y over a range of discount rates from zero to 25 percent (take 0%, 5%, 10%, 15%, 20%, 25%). Calculate the IRR of the projects. What is the relationship between NPV and IRR for your values? What is the crossover rate for these two projects and what it indicates for your values? Note - answer all the parts of the question.
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If the cash flows for Project M are C0 = -1,000; C1 = +800; C2 = +700 and C3= -200. Calculate the IRR for the project. For what range of discount rates does the project have a positive NPV?
6.Calculate the project's Modified Internal Rate of Return (MIRR). What critical assumption does the MIRR make that differentiates it from the IRR? TIP : look for the definition of Modified Internal Rate of Return, and then do it in excel, easy !!! Year Net Cash flow Future Value of Net Cash flow 0 -$20.8 example 1 $4.5 $7.97 (n=6, i=10%)=fv(.1,6,,4.5) 2 $6.3 (n=5, i=10%) 3 $5.2 (n=4, i=10%) 4 $3.9 (n=3, i=10%) 5 $2.1 (n=2, i=10%) 6 $1.3 (n=1, i=10%) 7 $0.5 (n=0, i=10%) Sum = $XX.XX MIRR = ( in excel ) Rate ( 7,-20.8, xx.xx) 7.Where does the value of MIRR fall relative to the discount rate and IRR?
Consider the following two projects: Project Year 0 Year 1 Year 2 Year 3 Year 4 Discount Cash Flow Cash Flow Cash Flow Cash Flow Cash Flow Rate A - 100 40 50 60 N/A 0.13 B - 73 30 30 30 30 0.13 The net present value (NPV) of project B is closest to: O A. 17.9 В. 20.3 C. 40.6 O D. 16.2 O O
Consider the following cash flows: C0= -22, C1= 20, C2= 20, C3=20, C4= -40 a) Calculate both the internal rates of return on this project out of which one is (a shade above) 7% and that the other is (a shade below) 34%. b) is the project attractive if the discount rate is 5%? What is the NPV? c) Is the project attractive is the discount rate is 20%? What is the NPV? d) Is the project attractive is the discount rate is 40%? What is the NPV?
Consider the following two projects: cash flows Project A Project B c0 -270 -2170 c1 115 143 c2 115 143 c3 115 143 c4 115 a. If the opportunity cost of capital is 10%, which of these 2 projects would you accept? b. Suppose that you can choose only one of these two projects. Which would you choose? The discount rate is still 10%. c. Which one would you choose if the cost of capital is 15%? d. What is the payback period for every project? e. Is the project with the shortest payback period also the one with the highest NPV? f. What are the internal rate of return on the two projects? g. Does the IRR rule in this case gives the same answer as NPV? h1. If the opportunity cost of capital is 10%, whats is the profitability index for each project? h2. Is the project with the highest profitability index also the…
Consider the following information: Cash Flows ($) Project C0 C1 C2 C3 C4 A –5,300 1,300 1,300 2,700 0 B –700 0 600 2,300 3,300 C –5,200 3,400 1,700 800 300 a. What is the payback period on each of the above projects? (Round your answers to 2 decimal places.) b. Given that you wish to use the payback rule with a cutoff period of two years, which projects would you accept?multiple choice 1 Project A Project B and Project C Project A and Project B Project A, Project B, and Project C Project C Project A and Project C Project B None c. If you use a cutoff period of three years, which projects would you accept?multiple choice 2 Project A, Project B, and Project C Project A Project B Project A and Project C Project C Project A and Project B Project B and Project C d. If the opportunity cost of capital is 10%, which projects have positive NPVs?multiple choice 3 Project B Project C Project A,…
1 2 The following cash flow pattern has two IRRs. Use Excel to draw a graph of the NPV of these cash flows as a function of the discount rate. Then use the IRR function to identify the two IRRS. Would you invest in this project if the opportunity cost were 30%? 3 Discount rate 10.00% -34.96 Data table 4 NPV S Year Cash flow 6 7 0 -300 8 1 300 9 2 200 10 3 150 11 4 122 12 5 133 13 6 -800 14 15 IRR 1 16 IRR2 17 18 19 + ? ?
Consider the following two projects: Cash flows Project A Project B C0�0 −$ 240 −$ 240 C1�1 100 123 C2�2 100 123 C3�3 100 123 C4�4 100 a. If the opportunity cost of capital is 8%, which of these two projects would you accept (A, B, or both)? b. Suppose that you can choose only one of these two projects. Which would you choose? The discount rate is still 8%. c. Which one would you choose if the cost of capital is 16%? d. What is the payback period of each project? e. Is the project with the shortest payback period also the one with the highest NPV? f. What are the internal rates of return on the two projects? g. Does the IRR rule in this case give the same answer as NPV? h. If the opportunity cost of capital is 8%, what is the profitability index for each project? i. Is the project with the highest profitability index also the one with the highest NPV? j. Which measure should you use to choose between the projects?

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