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CHAPTER 11—THE BASICS OF CAPITAL BUDGETING
e.
2.85 years
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.
WACC:
10.00%
Year
0
1
2
3
Cash flows
−$1,050
$450
$460
$470
a.
$ 92.37
b.
$ 96.99
c.
$101.84
d.
$106.93
e.
$112.28
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
WACC:
10.00%
Year
0
1
2
3
Cash flows
−$950
$500
$400
$300
a.
$54.62
b.
$57.49
c.
$60.52
d.
$63.54
e.
$66.72
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.
WACC:
14.00%
Year
0
1
2
3
4
Cash flows
−$1,200
$400
$425
$450
$475
a.
$41.25
b.
$45.84
c.
$50.93
d.
$56.59
e.
$62.88
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.
WACC:
12.00%
Year
0
1
2
3
4
5
Cash flows
−$1,100
$400
$390
$380
$370
$360
a.
$250.15
b.
$277.94
c.
$305.73
d.
$336.31
e.
$369.94
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.
Year
0
1
2
3
Cash flows
−$1,100
$450
$470
$490
a.
9.70%
b.
10.78%
c.
11.98%
d.
13.31%
e.
14.64%
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.
Year
0
1
2
3
4
Cash flows
−$850
$300
$290
$280
$270
a.
13.13%
b.
14.44%
c.
15.89%
d.
17.48%
e.
19.22%
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.
Year
0
1
2
3
4
5
Cash flows
−$9,500
$2,000
$2,025
$2,050
$2,075
$2,100
a.
2.08%
b.
2.31%
c.
2.57%
d.
2.82%
e.
3.10%
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.
Old WACC:
10.00%
New WACC:
11.25%
Year
0
1
2
3
Cash flows
−$1,000
$410
$410
$410
a.
−$18.89
b.
−$19.88
c.
−$20.93
d.
−$22.03
e.
−$23.13
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.
Old WACC:
8.00%
New WACC:
11.25%
Year
0
1
2
3
Cash flows
−$1,000
$410
$410
$410
a.
−$59.03
CHAPTER 11—THE BASICS OF CAPITAL BUDGETING
b.
−$56.08
c.
−$53.27
d.
−$50.61
e.
−$48.08
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.
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%
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.
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%
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.
WACC:
10.00%
Year
0
1
2
3
4
Cash flows
−$850
$300
$320
$340
$360
a.
14.08%
b.
15.65%
c.
17.21%
CHAPTER 11—THE BASICS OF CAPITAL BUDGETING
d.
18.94%
e.
20.83%
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.
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%
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?
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. Fernando Designs 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
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?
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. 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.
WACC:
7.50%
Year
0
1
2
3
4
CFS
−$1,100
$550
$600
$100
$100
CHAPTER 11—THE BASICS OF CAPITAL BUDGETING
CFL
−$2,700
$650
$725
$800
$1,400
a.
$138.10
b.
$149.21
c.
$160.31
d.
$171.42
e.
$182.52
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?
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
CHAPTER 11—THE BASICS OF CAPITAL BUDGETING
c.
$209.07
d.
$219.52
e.
$230.49
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.
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. 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.
CHAPTER 11—THE BASICS OF CAPITAL BUDGETING
WACC:
10.00%
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. 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.
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
CHAPTER 11—THE BASICS OF CAPITAL BUDGETING
e.
$19.35
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.
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
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.
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
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.
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
CHAPTER 11—THE BASICS OF CAPITAL BUDGETING
