CHAPTER 11—THE BASICS OF CAPITAL BUDGETING
e.
2.85 years
c
EASY
11-8 Payback Period
FOFM.BRIG.16.11.08 – Payback Period
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – OH – DISC.FOFM.BRIG.16.03 – Capital budgeting and cost of capital
Payback
Bloom’s: Analysis
Multiple Choice: Problem
85. Cornell Enterprises is considering a project that has the following cash flow and WACC data. What is the project’s
NPV? Note that a project’s projected NPV can be negative, in which case it will be rejected.
10.00%
0
1
3
−$1,050
$450
$470
a.
$ 92.37
b.
$ 96.99
c.
$101.84
d.
$106.93
e.
$112.28
a
EASY/MODERATE
11-2 Net Present Value (NPV)
FOFM.BRIG.16.11.02 – Net Present Value (NPV)
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – OH – DISC.FOFM.BRIG.16.03 – Capital budgeting and cost of capital
NPV
Bloom’s: Analysis
Multiple Choice: Problem
86. Warnock Inc. is considering a project that has the following cash flow and WACC data. What is the project’s NPV?
Note that a project’s projected NPV can be negative, in which case it will be rejected.
CHAPTER 11—THE BASICS OF CAPITAL BUDGETING
10.00%
0
1
3
−$950
$500
$300
a.
$54.62
b.
$57.49
c.
$60.52
d.
$63.54
e.
$66.72
c
EASY/MODERATE
11-2 Net Present Value (NPV)
FOFM.BRIG.16.11.02 – Net Present Value (NPV)
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – OH – DISC.FOFM.BRIG.16.03 – Capital budgeting and cost of capital
NPV
Bloom’s: Analysis
Multiple Choice: Problem
87. Jazz World Inc. is considering a project that has the following cash flow and WACC data. What is the project’s NPV?
Note that a project’s projected NPV can be negative, in which case it will be rejected.
14.00%
0
1
3
4
−$1,200
$400
$450
$475
a.
$41.25
b.
$45.84
c.
$50.93
d.
$56.59
e.
$62.88
e
EASY/MODERATE
11-2 Net Present Value (NPV)
FOFM.BRIG.16.11.02 – Net Present Value (NPV)
United States – OH – DISC.FOFM.BRIG.16.03 – Capital budgeting and cost of capital
NPV
CHAPTER 11—THE BASICS OF CAPITAL BUDGETING
88. Barry Company is considering a project that has the following cash flow and WACC data. What is the project’s NPV?
Note that a project’s projected NPV can be negative, in which case it will be rejected.
12.00%
0
1
3
4
5
−$1,100
$400
$380
$370
$360
a.
$250.15
b.
$277.94
c.
$305.73
d.
$336.31
e.
$369.94
EASY/MODERATE
11-2 Net Present Value (NPV)
FOFM.BRIG.16.11.02 – Net Present Value (NPV)
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – OH – DISC.FOFM.BRIG.16.03 – Capital budgeting and cost of capital
NPV
Bloom’s: Analysis
Multiple Choice: Problem
89. Datta Computer Systems is considering a project that has the following cash flow data. What is the project’s IRR?
Note that a project’s projected IRR can be less than the WACC (and even negative), in which case it will be rejected.
0
1
3
−$1,100
$450
$490
a.
9.70%
b.
10.78%
c.
11.98%
d.
13.31%
e.
14.64%
EASY/MODERATE
11-3 Internal Rate of Return (IRR)
FOFM.BRIG.16.11.03 – Internal Rate of Return (IRR)
Bloom’s: Analysis
Multiple Choice: Problem
CHAPTER 11—THE BASICS OF CAPITAL BUDGETING
90. Simkins Renovations Inc. is considering a project that has the following cash flow data. What is the project’s IRR?
Note that a project’s projected IRR can be less than the WACC (and even negative), in which case it will be rejected.
0
1
3
4
−$850
$300
$280
$270
a.
13.13%
b.
14.44%
c.
15.89%
d.
17.48%
e.
19.22%
a
EASY/MODERATE
11-3 Internal Rate of Return (IRR)
FOFM.BRIG.16.11.03 – Internal Rate of Return (IRR)
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – OH – DISC.FOFM.BRIG.16.03 – Capital budgeting and cost of capital
Bloom’s: Analysis
Multiple Choice: Problem
91. Maxwell Feed & Seed is considering a project that has the following cash flow data. What is the project’s IRR? Note
that a project’s projected IRR can be less than the WACC (and even negative), in which case it will be rejected.
0
1
3
4
5
−$9,500
$2,000
$2,050
$2,075
$2,100
a.
2.08%
b.
2.31%
c.
2.57%
d.
2.82%
e.
3.10%
c
EASY/MODERATE
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – OH – DISC.FOFM.BRIG.16.03 – Capital budgeting and cost of capital
Bloom’s: Analysis
Multiple Choice: Problem
CHAPTER 11—THE BASICS OF CAPITAL BUDGETING
92. Last month, Lloyd’s Systems analyzed the project whose cash flows are shown below. However, before the decision to
accept or reject the project, the Federal Reserve took actions that 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 projected NPV can be negative, in which case it should be rejected.
10.00%
New WACC:
11.25%
0
1
3
−$1,000
$410
$410
a.
−$18.89
b.
−$19.88
c.
−$20.93
d.
−$22.03
e.
−$23.13
MODERATE
11-2 Net Present Value (NPV)
FOFM.BRIG.16.11.02 – Net Present Value (NPV)
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – OH – DISC.FOFM.BRIG.16.03 – Capital budgeting and cost of capital
NPV sensitivity to WACC
Bloom’s: Evaluation
Multiple Choice: Problem
93. Lasik Vision Inc. recently analyzed the project whose cash flows are shown below. However, before Lasik decided to
accept or reject the project, the Federal Reserve took actions that 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 projected NPV can be negative, in which case it should be rejected.
8.00%
New WACC:
11.25%
0
1
3
−$1,000
$410
$410
a.
−$59.03
11-3 Internal Rate of Return (IRR)
FOFM.BRIG.16.11.03 – Internal Rate of Return (IRR)
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – OH – DISC.FOFM.BRIG.16.03 – Capital budgeting and cost of capital
Bloom’s: Analysis
Multiple Choice: Problem
CHAPTER 11—THE BASICS OF CAPITAL BUDGETING
b.
−$56.08
c.
−$53.27
d.
−$50.61
e.
−$48.08
a
MODERATE
11-2 Net Present Value (NPV)
FOFM.BRIG.16.11.02 – Net Present Value (NPV)
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – OH – DISC.FOFM.BRIG.16.03 – Capital budgeting and cost of capital
NPV sensitivity to WACC
Bloom’s: Evaluation
Multiple Choice: Problem
94. Ehrmann Data Systems is considering a project that has the following cash flow and WACC data. What is the project’s
MIRR? Note that a project’s projected MIRR can be less than the WACC (and even negative), in which case it will be
rejected.
10.00%
0
1
3
−$1,000
$450
$450
a.
9.32%
b.
10.35%
c.
11.50%
d.
12.78%
e.
14.20%
e
11-6 Modified Internal Rate of Return (MIRR)
FOFM.BRIG.16.11.06 – Modified Internal Rate of Return (MIRR)
CHAPTER 11—THE BASICS OF CAPITAL BUDGETING
95. Ingram Electric 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 projected MIRR can be less than the WACC (and even negative), in which case it
will be rejected.
11.00%
0
1
3
−$800
$350
$350
a.
8.86%
b.
9.84%
c.
10.94%
d.
12.15%
e.
13.50%
e
MODERATE
11-6 Modified Internal Rate of Return (MIRR)
FOFM.BRIG.16.11.06 – Modified Internal Rate of Return (MIRR)
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – OH – DISC.FOFM.BRIG.16.03 – Capital budgeting and cost of capital
MIRR
Bloom’s: Analysis
Multiple Choice: Problem
96. Malholtra 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 projected MIRR can be less than the WACC (and even negative), in which case it will be rejected.
10.00%
0
1
3
4
−$850
$300
$340
$360
a.
14.08%
b.
15.65%
c.
17.21%
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – OH – DISC.FOFM.BRIG.16.03 – Capital budgeting and cost of capital
MIRR
Bloom’s: Analysis
Multiple Choice: Problem
CHAPTER 11—THE BASICS OF CAPITAL BUDGETING
d.
18.94%
e.
20.83%
MODERATE
11-6 Modified Internal Rate of Return (MIRR)
FOFM.BRIG.16.11.06 – Modified Internal Rate of Return (MIRR)
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – OH – DISC.FOFM.BRIG.16.03 – Capital budgeting and cost of capital
MIRR
Bloom’s: Analysis
Multiple Choice: Problem
97. Hindelang 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 projected MIRR can be less than the WACC (and even negative), in which case it will be rejected.
12.25%
0
1
3
4
−$850
$300
$340
$360
a.
13.42%
b.
14.91%
c.
16.56%
d.
18.22%
e.
20.04%
c
MODERATE
11-6 Modified Internal Rate of Return (MIRR)
FOFM.BRIG.16.11.06 – Modified Internal Rate of Return (MIRR)
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – OH – DISC.FOFM.BRIG.16.03 – Capital budgeting and cost of capital
CHAPTER 11—THE BASICS OF CAPITAL BUDGETING
98. Stern Associates is considering a project that has the following cash flow data. What is the project’s payback?
0
1
3
4
5
−$1,100
$300
$320
$330
$340
a.
2.31 years
b.
2.56 years
c.
2.85 years
d.
3.16 years
e.
3.52 years
e
MODERATE
11-8 Payback Period
FOFM.BRIG.16.11.08 – Payback Period
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – OH – DISC.FOFM.BRIG.16.03 – Capital budgeting and cost of capital
Payback
Bloom’s: Analysis
Multiple Choice: Problem
99. Fernando Designs is considering a project that has the following cash flow and WACC data. What is the project’s
discounted payback?
10.00%
0
1
3
−$900
$500
$500
a.
1.88 years
b.
2.09 years
c.
2.29 years
d.
2.52 years
e.
2.78 years
MIRR
Bloom’s: Analysis
Multiple Choice: Problem
CHAPTER 11—THE BASICS OF CAPITAL BUDGETING
100. Masulis Inc. is considering a project that has the following cash flow and WACC data. What is the project’s
discounted payback?
10.00%
0
1
3
4
−$950
$525
$445
$405
a.
1.61 years
b.
1.79 years
c.
1.99 years
d.
2.22 years
e.
2.44 years
MODERATE
11-8 Payback Period
FOFM.BRIG.16.11.08 – Payback Period
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – OH – DISC.FOFM.BRIG.16.03 – Capital budgeting and cost of capital
Discounted payback
Bloom’s: Analysis
Multiple Choice: Problem
101. Tesar Chemicals 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 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.
7.50%
0
1
3
4
−$1,100
$550
$100
$100
MODERATE
11-8 Payback Period
FOFM.BRIG.16.11.08 – Payback Period
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – OH – DISC.FOFM.BRIG.16.03 – Capital budgeting and cost of capital
Discounted payback
Bloom’s: Analysis
Multiple Choice: Problem
CHAPTER 11—THE BASICS OF CAPITAL BUDGETING
−$2,700
$650
$800
$1,400
a.
$138.10
b.
$149.21
c.
$160.31
d.
$171.42
e.
$182.52
a
MODERATE
Comprehensive
102. A firm 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 the firm on the best procedure. If the wrong decision criterion is used, how much potential value
would the firm lose?
6.00%
0
1
3
4
−$1,025
$380
$380
$380
−$2,150
$765
$765
$765
a.
$188.68
b.
$198.61
CHAPTER 11—THE BASICS OF CAPITAL BUDGETING
c.
$209.07
d.
$219.52
e.
$230.49
c
MODERATE/CHALLENGING
11-5 Reinvestment Rate Assumptions
CHAPTER 11—THE BASICS OF CAPITAL BUDGETING
103. Sexton 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 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 one with the higher IRR will also have the higher NPV, so no value will be lost if the IRR
method is used.
10.25%
0
1
3
4
−$2,050
$750
$770
$780
−$4,300
$1,500
$1,536
$1,554
a.
$134.79
b.
$141.89
c.
$149.36
d.
$164.29
e.
$205.36
c
MODERATE/CHALLENGING
11-5 Reinvestment Rate Assumptions
FOFM.BRIG.16.11.05 – Reinvestment Rate Assumptions
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – OH – DISC.FOFM.BRIG.16.03 – Capital budgeting and cost of capital
NPV and IRR
Bloom’s: Evaluation
Multiple Choice: Problem
104. Moerdyk & 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 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 one with the higher IRR will also have the higher NPV, i.e., no conflict will exist.
NPV and IRR
Bloom’s: Evaluation
Multiple Choice: Problem
CHAPTER 11—THE BASICS OF CAPITAL BUDGETING
10.00%
0
1
3
4
−$1,025
$650
$250
$50
−$1,025
$100
$500
$700
a.
$5.47
b.
$6.02
c.
$6.62
d.
$7.29
e.
$7.82
e
MODERATE/CHALLENGING
105. Kosovski 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.
7.75%
0
1
3
4
−$1,050
$675
−$1,050
$360
$360
$360
a.
$11.45
b.
$12.72
c.
$14.63
d.
$16.82
CHAPTER 11—THE BASICS OF CAPITAL BUDGETING
e.
$19.35
MODERATE/CHALLENGING
11-5 Reinvestment Rate Assumptions
106. 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.
8.75%
0
1
3
4
−$1,100
$375
$375
$375
−$2,200
$725
$725
$725
a.
$32.12
b.
$35.33
c.
$38.87
d.
$40.15
e.
$42.16
CHAPTER 11—THE BASICS OF CAPITAL BUDGETING
107. Yonan 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 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.
10.25%
0
1
3
4
−$950
$500
$0
$0
−$2,100
$400
$800
$1,000
a.
$24.14
b.
$26.82
c.
$29.80
d.
$33.11
e.
$36.42
MODERATE/CHALLENGING
Comprehensive
CHAPTER 11—THE BASICS OF CAPITAL BUDGETING
108. Noe Drilling 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, i.e., 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.
7.00%
0
1
3
4
−$1,100
$550
$100
$100
−$2,750
$725
$800
$1,400
a.
$185.90
b.
$197.01
c.
$208.11
d.
$219.22
e.
$230.32
a
MODERATE/CHALLENGING
Comprehensive
CHAPTER 11—THE BASICS OF CAPITAL BUDGETING