Assignment

Use the following information for Questions 1 through 3:

 

Assume you are presented with the following mutually exclusive investments whose expected net cash

flows are as follows:

 

EXPECTED NET CASH FLOWS:

 

Year Project A Project B

0 −$400 −$650

1 −528 210

2 −219 210

3 −150 210

4 1,100 210

5 820 210

6 990 210

7 −325 210

 

1. (a) What is each project’s IRR?

 

(b) If each project’s cost of capital were 10%, which project, if either, should be selected? If the

cost of capital were 17%, what would be the proper choice?

 

 

2. (a) What is each project’s MIRR at the cost of capital of 10%? At 17%? (Hint: Consider Period 7

as the end of Project B’s life.)

 

 

3. What is the crossover rate, and what is its significance?

FIN 534 – Homework Set #4

 

 

Use the following information for Question 4:

 

The staff of Porter Manufacturing has estimated the following net after-tax cash flows and probabilities for a new manufacturing process:

 

Line 0 gives the cost of the process, Lines 1 through 5 give operating cash flows, and Line 5* contains the

Estimated salvage values. Porter’s cost of capital for an average-risk project is 10%.

 

Net After-Tax Cash Flows

 

Year P = 0.2 P = 0.6 P = 0.2

0 −$100,000 −$100,000 −$100,000

1 20,000 30,000 40,000

2 20,000 30,000 40,000

3 20,000 30,000 40,000

4 20,000 30,000 40,000

5 20,000 30,000 40,000

5* 0 20,000 30,000

 

4. Assume that the project has average risk. Find the project’s expected NPV. (Hint: Use expected

values for the net cash flow in each year.)