Capital Budgeting Problem Set - Building The Pride

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8. Assuming a discount rate of 12% and the following after-tax cash flows: CF0 CF1 CF2 CF3 CF4 CF5 CF6 - $10,000 6,000 3,000 3,000 -2,000 -1,000 5,000 find the project’s: NPV ______________ (578.76) MIRR ______________ (12.89%) Payback ______________ (2.33 yr.) Profitability Index ______________ (1.0489) 9. Consider the following cash flows: CFO CF1 CF2 CF3 CF4 CF5 -$100,000 $34,000 $34,000 -$10,000 $40,000 $50,000 Assuming k=11 percent, calculate the following numbers. If any numbers might be questionable the find another way to verify the number. Show all your work. NPV ___________________ ($6,935.68) IRR ___________________ (13.56%) Payback ___________________ (4.04) MIRR ___________________ (12.4%) PI ___________________ (1.065) 10. You are evaluating a project with the following cash flows: CFO CF1 CF2 CF3 CF4 CF5 -25,000 6,000 7,000 -4,000 15,000 10,000 Assume a required rate of return of 10%. Find the NPV? (-311.17) Find the Payback ? (4.1 yr.) Should you calculate the project’s IRR? Why or why not? Find the MIRR? (9.75%)
11. A project has the following cash flows: (assume a required rate of return of 10%) CF0 CF1 CF2 CF3 CF4 CF5 -$100,000 $40,000 $40,000 $60,000 -$20,000 $10,000 Can you use IRR to determine if this is an attractive project? Why or why not? Calculate the MIRR for this project. 12. What are the problems associated with exclusively using IRR to choose investment projects? 13. Why can’t you use IRR to choose between mutually exclusive projects? 14. Explain the advantages that MIRR has over IRR 15. What are the disadvantages of using regular payback? 16. What is the one advantage that IRR has over NPV? 17. In outline form, explain the problems associated with using IRR both with independent and mutually exclusive projects. Make sure you identify the source of the problems if relevant. Even after you share the above information with your boss why might she still want you to use IRR in all your presentations to the Board of Directors? 18. The Malone Truck Company is considering opening a new loading dock at a cost of $280,000 for new equipment and will require an investment of $20,000 in accounts receivable. The life of the new equipment is seven years. The equipment will be depreciated straight-line over its seven-year life to a salvage value of zero, even though it is expected that the equipment to have revenues of $250,000 per year over the next seven years, but revenues from the firm’s other loading docks is expected to decrease by a total of $25,000 per year because some of their business will move to the new loading dock. Fixed costs for the new dock are estimated to be $26,000 per year and variable costs are expected to be $155,000 per year. The firms tax rate is 34% and the required rate of return is 15%. What should the firm do? (NPV -112,599.78; IRR 1.93%) 19. Dagny Corporation is evaluating whether to replace a printing press with a newer model, which, owing to more efficient operation, will reduce operating costs from $40,000 to $32,000 per year. Sales are not expected to change. The old press cost $60,000 when purchased five years ago, had an estimated useful life of 15 years, zero salvage value at the end of its useful life and is being depreciated straight-line. At present, its market value is estimated to be $40,000, if sold outright. The new press costs $80,000 and would be depreciated straight-line to a zero salvage over a ten-year life. However, management expects to be able to sell the new press for $15,000 at the end of ten years. The
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Capital Budgeting Problem Set - Building The Pride

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