Question

If your able to work out the problems instead of using excel since excel isnt accessible on the exam.

Consider the following projects, for a firm using a discount rate of 10%. If the projects are mutually exclusive, which, if any, project(s) should the firm accept?

Project                   NPV                                           IRR                                            PI

E                               $200,000                                10.2%                                       1.04

F                               $(200,001)                            11%                                           .81

G                               $1                                                10%                                           1.01

H                              $(235,000)                            9%                                            .95

a.               E

b.              F

c.               H

d.              F and H

You are considering two mutually exclusive projects. Both projects have an initial cost of $52,000. Project A produces cash inflows of $25,300, $37,100, and $22,000 for years 1 through 3, respectively. Project B produces cash inflows of $43,600, $19,800 and $10,400 for years 1 through 3, respectively. The required rate of return is 14.2 percent for Project A and 13.9 percent for Project B. Which project should you accept and why?

Project A; because it has the higher required rate of return.

Project A; because it has the larger NPV.

Project A; because it has the larger IRR.

Project B; because it has the larger NPV

A proposed project has an initial cost of $38,000 and cash inflows of $12,300, $24,200, and $16,100 for years 1 through 3, respectively. The required rate of return is 16.8 percent. Based on IRR, should this project be accepted? Why or why not?

No; The IRR exceeds the required return by .58 percent.

No; The IRR is less than the required return by 1.03 percent.

Yes; The IRR exceeds the required return by .58 percent.

Yes; The IRR exceeds the required return by about 1.03 percent.

A project has projected cash flows of -$148,500, $32,800, $64,200, -$7,500 and $87,300 for years 0 to 4, respectively. Should this project be accepted based on the combination approach to the modified internal rate of return if both the discount rate and the reinvestment rate are 12.6 percent? Why or why not?

Yes; The MIRR is 8.81 percent.

Yes; The MIRR is 9.23 percent.

No; The MIRR is 8.81 percent.

No; The MIRR is 9.06 percent.

Answer 1

(1) All four projects have a required return of 10 % which implies a cash flow discount rate of 10 %. If any project has IRR less than equal to the required rate of 10 %, then that project either generates negative value or no value for the firm, thereby being ill-suited. This analysis leaves two projects namely E and F of which E adds value owing to its positive NPV and F erodes value owing to its negative NPV. Therefore, the preferred project will be Project E.

NOTE: Please raise separate queries for solutions to the remaining unrelated questions.