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CFIN4
Chapter 9 – Capital Budgeting Techniques
c. 13.00%
d. 13.36%
e. 13.59%
81. Los Angeles Lumber Company (LALC) is considering a project with a cost of $1,000 at t = 0 and inflows of $300 at
the end of Years 1-5. LALC's cost of capital is 10 percent. What is the project's modified IRR (MIRR)?
a. 10.0%
b. 12.9%
c. 15.2%
d. 18.3%
e. 20.7%
82. Capitol City Transfer Company is considering building a new terminal in Salt Lake City. If the company goes ahead
with the project, it must spend $1 million immediately (at t = 0) and another $1 million at the end of Year 1 (t = 1). It
will then receive net cash flows of $0.5 million at the end of Years 2-5, and it expects to sell the property and net $1
million at the end of Year 6. All cash inflows and outflows are after taxes. The company's required rate of return is
12 percent, and it uses the modified IRR criterion for capital budgeting decisions. What is the project's modified IRR
(MIRR)?
a. 11.9%
b. 12.0%
c. 11.4%
CFIN4
Chapter 9 – Capital Budgeting Techniques
d. 11.5%
e. 11.7%
83. Houston Inc. is considering a project which involves building a new refrigerated warehouse which will cost
$7,000,000 at t = 0 and which is expected to have operating cash flows of $500,000 at the end of each of the next 20
years. However, repairs which will cost $1,000,000 must be incurred at the end of the 10th year. Thus, at the end of
Year 10 there will be a $500,000 operating cash inflow and an outflow of $1,000,000 for repairs. If Houston's
required rate of return is 12 percent, what is the project's MIRR? (Hint: Think carefully about the MIRR equation
and the treatment of cash outflows.)
a. 7.75%
b. 8.29%
c. 9.81%
d. 11.45%
e. 12.33%
84. Your company is considering two mutually exclusive projects, X and Y, whose costs and cash flows are shown
below:
Year
X
Y
0
−$2,000
−$2,000
1
200
2,000
2
600
200
3
800
100
4
1,400
75
The projects are equally risky, and the firm's required rate of return is 12 percent. You must make a
recommendation, and you must base it on the modified IRR. What is the MIRR of the better project?
a. 12.00%
b. 11.46%
c. 13.59%
d. 12.89%
e. 15.73%
85. International Transport Company is considering building a new facility in Seattle. If the company goes ahead with the
project, it will spend $2 million immediately (at t = 0) and another $2 million at the end of Year 1(t = 1). It will then
receive net cash flows of $1 million at the end of Years 2-5, and it expects to sell the property for $2 million at the end
of Year 6. The company's required rate of return is 12 percent, and it uses the modified IRR criterion for capital
budgeting decisions. Which of the following statements is most correct?
a. The project should be rejected because the modified IRR is less than the regular IRR.
b. The project should be accepted because the modified IRR is greater than the required rate of return.
c. The regular IRR is less than the required rate of return. Under this condition, the modified IRR will also be
less than the regular IRR.
d. If the regular IRR is less than the required rate of return, then the modified IRR will be greater than the
regular IRR.
e. Given the data in the problem, the NPV is negative. This demonstrates that the modified IRR criterion is not
always a valid decision method for projects such as this one.
86. Mooradian Corporation estimates that its required rate of return is 11 percent. The company is considering two
mutually exclusive projects whose after-tax cash flows are as follows:
Year
Project S
Project L
0
−$3,000
−$9,000
1
2,500
−1,000
2
1,500
5,000
3
1,500
5,000
4
−500
5,000
What is the modified internal rate of return (MIRR) of the project with the highest NPV?
a. 11.89%
b. 13.66%
c. 16.01%
d. 18.25%
e. 20.12%
87. O'Donnell Inc. has a required rate of return of 11.5 percent. The company has a project with the following cash
flows:
Year Cash flow
0 −$200
1 235
2 −65
3 300
What is the project's modified internal rate of return (MIRR)?
a. 28.15%
b. 32.90%
c. 36.27%
d. 39.87%
e. 40.15%
88. An investment project has an initial cost, and then generates inflows of $50 a year for the next five years. The
project has a payback period of 3.6 years. What is the project's internal rate of return?
a. 11.18%
b. 12.05%
c. 13.47%
d. 14.66%
e. 15.89%
89. Your company is choosing between following non-repeatable, equally risky, mutually exclusive projects with the cash
flows shown below. Your required rate of return is 10 percent. How much value will your firm sacrifice if it selects
the project with the higher IRR?
a. $243.43
b. $291.70
c. $332.50
d. $481.15
e. $535.13
Project L Project S
Time CF CF
0 −2,000 −1,000
1 668.76 500
2 668.76 500
3 668.76 500
4 668.76
5 668.76
CFIN4
Chapter 9 – Capital Budgeting Techniques
90. Given the following net cash flows, determine the IRR of the project:
a. 36%
b. 32%
c. 28%
d. 24%
e. 20%
Net cash
Time flow
0 $1,520
1 −1,000
2 −1,500
3 500
91. A company is analyzing two mutually exclusive projects, S and L, whose cash flows are shown below:
The company's required rate of return is 12 percent. What is the IRR of the better project? (Hint: Note that the
better project may or may not be the one with the higher IRR.)
a. 13.09%
b. 12.00%
c. 17.46%
d. 13.88%
e. 12.53%
92. Woodson Inc. has two possible projects, Project A and Project B, with the following cash flows:
Year
Project A
Project B
0
−150,000
−100,000
1
100,000
45,000
2
105,000
65,000
3
40,000
80,000
At what required rate of return do the two projects have the same net present value (NPV)? (In other words, what
is the "crossover rate" of the projects' NPV profiles?)
a. 10.3%
b. 13.5%
c. 15.8%
d. 21.7%
e. 34.8%
93. As the capital budgeting director for Chapel Hill Coffins Company, you are evaluating construction of a new plant.
The plant has a net cost of $5 million in Year 0 (today), and it will provide net cash inflows of $1 million at the end of
Year 1, $1.5 million at the end of Year 2, and $2 million at the end of Years 3 through 5. Within what range is the
plant's IRR?
a. 14-15%
b. 15-16%
c. 16-17%
d. 17-18%
e. 18-19%
94. After getting her degree in marketing and working for 5 years for a large department store, Sally started her own spe
shop in a regional mall. Sally's current lease calls for payments of $1,000 at the end of each month for the next 60 mo
Now the landlord offers Sally a new 5-year lease which calls for zero rent for 6 months, then rental payments of $1,0
end of each month for the next 54 months. Sally's required rate of return is 11 percent. By what absolute dollar amou
accepting the new lease change Sally's theoretical net worth? (Hint: The required rate of return per month is 11%/12
0.9166667%.)
a. $2,810.09
b. $3,243.24
c. $3,803.06
d. $4,299.87
e. $4,681.76
