93. Corner Jewelers, Inc. recently analyzed the project whose cash flows are shown below. However,
before the company decided to accept or reject the project, the Federal Reserve changed interest rates
and therefore the firm’s WACC. The Fed’s action did not affect the forecasted cash flows. By how
much did the change in the WACC affect the project’s forecasted NPV? Note that a project’s expected
NPV can be negative, in which case it should be rejected.
Old WACC:
8.00%
New WACC:
11.25%
Year
0
1
2
3
Cash flows
−$1,000
$410
$410
$410
a.
−$59.03
b.
−$56.08
c.
−$53.27
d.
−$50.61
e.
−$48.08
94. Computer Consultants Inc. is considering a project that has the following cash flow and WACC data.
What is the project’s MIRR? Note that a project’s MIRR can be less than the WACC (and even
negative), in which case it will be rejected.
WACC:
10.00%
Year
0
1
2
3
Cash flows
−$1,000
$450
$450
$450
a.
9.32%
b.
10.35%
c.
11.50%
d.
12.78%
e.
14.20%
WACC:
10.00%
Year
0
1
2
3
Cash flows
$450
$450
$450
Compounded values, FVs
Old WACC:
8.00%
New WACC:
11.25%
Year
0
1
2
3
Cash flows
−$1,000
$410
$410
$410
95. Wiley’s Wire Products is considering a project that has the following cash flow and WACC data. What
is the project’s MIRR? Note that a project’s MIRR can be less than the WACC (and even negative), in
which case it will be rejected.
WACC:
11.00%
Year
0
1
2
3
Cash flows
−$800
$350
$350
$350
a.
8.86%
b.
9.84%
c.
10.94%
d.
12.15%
e.
13.50%
WACC:
11.00%
Year
Cash flows
−$800
$350
$350
$350
Compounded values, FVs
Alternative calculation, using Excel’s MIRR function
96. Watts Co. is considering a project that has the following cash flow and WACC data. What is the
project’s MIRR? Note that a project’s MIRR can be less than the WACC (and even negative), in which
case it will be rejected.
WACC:
10.00%
Year
0
1
2
3
4
Cash flows
−$850
$300
$320
$340
$360
a.
14.08%
b.
15.65%
MIRR = 14.20%
Alternative calculation, using Excel’s MIRR function
c.
17.21%
d.
18.94%
e.
20.83%
97. Westwood Painting Co. is considering a project that has the following cash flow and WACC data.
What is the project’s MIRR? Note that a project’s MIRR can be less than the WACC (and even
negative), in which case it will be rejected.
WACC:
12.25%
Year
0
1
2
3
4
Cash flows
−$850
$300
$320
$340
$360
a.
13.42%
b.
14.91%
c.
16.56%
d.
18.22%
e.
20.04%
WACC:
12.25%
Year
Compounded values
MIRR = 16.56%
Alternative calculation, using Excel’s MIRR function
WACC:
10.00%
Year
Compounded values
MIRR = 15.65%
Alternative calculation, using Excel’s MIRR function
98. Suzanne‘s Cleaners is considering a project that has the following cash flow data. What is the project’s
payback?
Year
0
1
2
3
4
5
Cash flows
−$1,100
$300
$310
$320
$330
$340
a.
2.31 years
b.
2.56 years
c.
2.85 years
d.
3.16 years
e.
3.52 years
99. Craig’s Car Wash Inc. is considering a project that has the following cash flow and WACC data. What
is the project’s discounted payback?
WACC:
10.00%
Year
0
1
2
3
Cash flows
−$900
$500
$500
$500
a.
1.88 years
b.
2.09 years
c.
2.29 years
d.
2.52 years
e.
2.78 years
WACC:
10.00%
Year
Cash flows
PV of CFs
−$900
$413
$376
Cumulative CF
Payback = 2.09 years
Year
Cash flows
Cumulative CF
Payback = 3.52 years
100. Shannon Co. is considering a project that has the following cash flow and WACC data. What is the
project’s discounted payback?
WACC:
10.00%
Year
0
1
2
3
4
Cash flows
−$950
$525
$485
$445
$405
a.
1.61 years
b.
1.79 years
c.
1.99 years
d.
2.22 years
e.
2.44 years
101. 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.
WACC:
7.50%
Year
0
1
2
3
4
CFS
−$1,100
$550
$600
$100
$100
CFL
−$2,700
$650
$725
$800
$1,400
a.
$138.10
b.
$149.21
c.
$160.31
d.
$171.42
e.
$182.52
WACC:
10.00%
Year
PV of CFs
Payback = 2.22 years
102. Murray Inc. is considering Projects S and L, whose cash flows are shown below. These projects are
mutually exclusive, equally risky, and not repeatable. The CEO wants to use the IRR criterion, while
the CFO favors the NPV method. You were hired to advise Murray on the best procedure. If the wrong
decision criterion is used, how much potential value would Murray lose?
WACC:
6.00%
Year
0
1
2
3
4
CFS
−$1,025
$380
$380
$380
$380
CFL
−$2,150
$765
$765
$765
$765
a.
$188.68
b.
$198.61
c.
$209.07
d.
$219.52
e.
$230.49
WACC:
6.000%
Year
0
1
2
3
4
CFS
−$1,025
$380
$380
$380
$380
CFL
−$2,150
$765
$765
$765
$765
−$1,125
$385
$385
$385
$385
Crossover rate = 13.86%
WACC:
7.5000%
Year
CFS
Compounded CFs:
9.5469%
CFL
Compounded CFs:
9.6663%
Crossover rate = 10.16%
At interest rates < crossover rate, conflict exists.
10.71181%
$224.3065
12.24157%
MIRR Choice:
IRR Choice:
NPV Choice:
Lost value using IRR versus MIRR:
Lost value using MIRR versus NPV:
Lost value using IRR versus NPV:
103. Projects S and L, whose cash flows are shown below, are mutually exclusive, equally risky, and not
repeatable. Hooper Inc. is considering which of these two projects to undertake. If the decision is made
by choosing the project with the higher IRR, how much value will be forgone? Note that under certain
conditions choosing projects on the basis of the IRR will not cause any value to be lost because the
project with the higher IRR will also have the higher NPV, so no value will be lost if the IRR method
is used.
WACC:
10.25%
Year
0
1
2
3
4
CFS
−$2,050
$750
$760
$770
$780
CFL
−$4,300
$1,500
$1,518
$1,536
$1,554
a.
$134.79
b.
$141.89
c.
$149.36
d.
$164.29
e.
$205.36
104. Markman & Sons is considering Projects S and L. These projects are mutually exclusive, equally
risky, and not repeatable and their cash flows are shown below. If the decision is made by choosing the
project with the higher IRR, how much value will be forgone? Note that under certain conditions
choosing projects on the basis of the IRR will not cause any value to be lost because the project with
the higher IRR will also have the higher NPV, i.e., no conflict will exist.
WACC:
10.00%
WACC:
10.25%
Year
0
1
2
3
4
CFS
−$2,050
$750
$760
$770
$780
CFL
−$4,300
$1,500
$1,518
$1,536
$1,554
−$2,250
Crossover rate = 13.275%
At interest rates < crossover rate, conflict exists.
= Value lost if use the IRR criterion
Year
0
1
2
3
4
CFS
−$1,025
$650
$450
$250
$50
CFL
−$1,025
$100
$300
$500
$700
a.
$5.47
b.
$6.02
c.
$6.62
d.
$7.29
e.
$7.82
105. Carolina Company is considering Projects S and L, whose cash flows are shown below. 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? Note that under some conditions
choosing projects on the basis of the IRR will cause $0.00 value to be lost.
WACC:
7.75%
Year
0
1
2
3
4
CFS
−$1,050
$675
$650
CFL
−$1,050
$360
$360
$360
$360
a.
$11.45
b.
$12.72
c.
$14.63
d.
$16.82
e.
$19.35
WACC:
10.000%
Year
0
1
2
3
4
CFS
−$1,025
$250
$50
CFL
−$1,025
$500
$700
Crossover rate = 10.549%
At interest rates < crossover rate, conflict exists.
= Value lost if use the IRR criterion
106. Silverman Co. 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:
8.75%
Year
0
1
2
3
4
CFS
−$1,100
$375
$375
$375
$375
CFL
−$2,200
$725
$725
$725
$725
a.
$32.12
b.
$35.33
c.
$38.87
d.
$40.15
e.
$42.16
WACC:
7.75%
CFS
−$1,050
$360
$360
107. Farmer Co. 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 shorter payback, some value may be forgone. How much value will be lost in this instance?
Note that under some conditions choosing projects on the basis of the shorter payback will not cause
value to be lost.
WACC:
10.25%
Year
0
1
2
3
4
CFS
−$950
$500
$800
$0
$0
CFL
−$2,100
$400
$800
$800
$1,000
a.
$24.14
b.
$26.82
c.
$29.80
d.
$33.11
e.
$36.42
WACC:
10.250%
Year
CFS
CFL
Crossover rate = 11.093%
At interest rates < crossover rate, conflict exists.
Value lost
= Value lost if use the MIRR criterion
108. Langton Inc. is considering Projects S and L, whose cash flows are shown below. These projects are
mutually exclusive, equally risky, and not repeatable. The CEO believes the IRR is the best selection
criterion, while the CFO advocates the MIRR. If the decision is made by choosing the project with the
higher IRR rather than the one with the higher MIRR, how much, if any, value will be forgone. In
other words, what’s the NPV of the chosen project versus the maximum possible NPV? Note that (1)
“true value” is measured by NPV, and (2) under some conditions the choice of IRR vs. MIRR will
have no effect on the value lost.
WACC:
7.00%
Year
0
1
2
3
4
CFS
−$1,100
$550
$600
$100
$100
CFL
−$2,750
$725
$725
$800
$1,400
a.
$185.90
b.
$197.01
c.
$208.11
d.
$219.22
e.
$230.32
and NPV.
