Question

A capital investment project requires an initial investment of $100 and generates positive cash flows, $50 and $100, at the end of the first and second years, respectively. (There is no cash flow after the second year) The firm uses a hurdle rate of 15% for projects of similar risk.

Determine whether you should accept or reject the project based on NPV.

Determine whether you should accept or reject the project based on IRR.

Determine whether you should accept or reject the project based on MIRR.

Answer #1

Calculation of NPV:

Year | Expected cash flow | Present value @15% |

0 | (100) | (100) |

1 | 50 | 43.4783 |

2 | 100 | 75.6144 |

NPV = 19.0927 i.e positive NPV Hence, project should be accepted.

Calculation of IRR of the project:

100=[50÷(1+r)]+[100÷(1+r)^2]

Following are steps of guessing r

Step:Compute excess cash flow per year=(50+100-100)/2=25

Step:Return on Initial Investment=(25/100)×100=25%

Step:Return on unrecovered investment balance=25×1.5=37.5

Step:Since cash flows are poor then reduce by 3% or 4%

At r = 32%

Right hand side = 39+58=97

Hence,IRR = 32%

Since approximate IRR is greater than hurdle rate this shows project should be accepted.

Calculation of MIRR:

(PV of return phase÷PV Of Initial Investment)this is under the root which is then multiplied by (1.15-1)

=square root of (119.0927/100)×(1.15-1)

=1.19092×.15

=.1786 or 17.86%

Grey company is analyzing a project that requires an initial
investment of $600,000. The project's expected cash flows are:
(Year 1) $350,000, (Year 2) -$125,000, (Year 3) $500,000 and (Year
4) $400,000.
1. Grey company's WACC is 10%, and the project has the same risk
as the firm's average project. Calculate this project's modified
internal rate of return (MIRR): _______%.
2. If Grey company's managers select projects based on the MIRR
criterion, they should accept or reject this
independent project....

Cute Camel Woodcraft Company is analyzing a project that
requires an initial investment of $2,750,000. The project’s
expected cash flows are:
Year
Cash Flow
Year 1
$350,000
Year 2
–125,000
Year 3
400,000
Year 4
500,000
Cute Camel Woodcraft Company’s WACC is 9%, and the project has
the same risk as the firm’s average project. Calculate this
project’s modified internal rate of return (MIRR):
19.63%
-16.48%
27.71%
25.40%
If Cute Camel Woodcraft Company’s managers select projects based
on the MIRR...

Light Sweet Petroleum, Inc., is trying to evaluate an
exploration project with the following cash flows:
Year Cash Flow
0 -$39,000,000
1 63,000,000
2 -12,000,000
If the company requires a 12 percent return on its investments,
should it accept this project?
Yes, the IRR is below the 12% hurdle rate
No, the IRR is above the 12% hurdle rate
Cannot determine because there are multiple IRRs
Yes, the NPV is positive
No, the NPV is negative

The IRR evaluation method assumes that cash flows from the
project are reinvested at the same rate equal to the IRR. However,
in reality the reinvested cash flows may not necessarily generate a
return equal to the IRR. Thus, the modified IRR approach makes a
more reasonable assumption other than the project’s IRR.
Consider the following situation:
Blue Llama Mining Company is analyzing a project that requires
an initial investment of $450,000. The project’s expected cash
flows are:
Year
Cash...

The IRR evaluation method assumes that cash flows from the
project are reinvested at the same rate equal to the IRR. However,
in reality the reinvested cash flows may not necessarily generate a
return equal to the IRR. Thus, the modified IRR approach makes a
more reasonable assumption other than the project’s IRR.
Consider the following situation:
Green Caterpillar Garden Supplies Inc. is analyzing a project
that requires an initial investment of $400,000. The project’s
expected cash flows are:
Year...

Which of the
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a. Consider a
project that generates a negative cash flow in year 0 and a
positive cash flow in year 1. The NPV rule will always lead to the
same decision for this project as the IRR rule.
b. Higher NPV
projects have longer payback periods.
c. Two projects with
identical expected cash flows but different risk profiles have the
same IRR. d. IRR is affected by the scale of the investment
opportunity.

Risky Business is looking at a project with the following
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Initial investment at start of project: $13,000,000
Cash flow at end of year one: $2,080,000
Cash flow at end of years two through six: $2,600,000
each year
Cash flow at end of years seven through nine: $2,496,000
each year
Cash flow at end of year ten: $1,920,000
Risky Business wants to know the payback period, NPV, IRR,
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at end of years seven through nine: $2,527,200 each year Cash
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You've estimated the following cash flows (in $) for a
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A
B
1
Year
Cash flow
2
0
-3,430
3
1
974
4
2
1,281
5
3
1,996
The required return is 8.5%.
1. What is the IRR for the project?
2. What is the NPV of the project?
3 .What should you do?
Check all that apply:
Reject the project based on its NPV
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If an investment project is described by the sequence of cash
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Year
Cash flow
0
-300
1
-900
2
1100
3
500
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Find the IRR (using 7%, 10%, 11%) of an investment having
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