Capital Budgeting Problem Set - Building The Pride

$700,000 ($200,000 for the land and $500,000 for the plant). What is the NPV of making
this investment if the required rate of return is 16%. Should they make the investment?
(NPV = -$1,130,630)
32. Matrix Printers, Inc. discovered a totally new method of laser printing and insiders have
stated that this the most revolutionary breakthrough ever made by the firm. Matrix
estimates that to put the new printers into the production the firm will have to invest
$1,000,000 and that the firm will be able to have positive cash flows of $500,000 per year
for the next four years until the competition catches up. Matrix required rate of return is
12%. What is the IRR on this new project? Is this a realistic estimate of Matrix actual
earnings over the four year period? Can you help them make a better estimate of the
firm's actual IRR over the period? What is that more realistic rate and why is it better?
(IRR 34.90%; MIRR 24.33%)
33. What is it that makes MIRR superior to IRR? Be precise and thorough.
34. List three potential problems with using IRR in making capital budgeting decisions.
35. Given the advantages of NPV over all other capital budgeting tools why would you ever
want to compute payback, IRR, MIRR or PI?
36. Would there ever be situations where a firm would knowingly accept projects with a
negative NPV? If so, what might these be?
37. Describe how an investment opportunity schedule and an MCC schedule can be used
together to determine the optimal capital budget. What would you do if a break point in
the MCC schedule came in the middle of one of the projects on the investment
opportunity schedule. you may use a simple example to illustrate , if you like.
38. Capitol City transfer Company is considering building a new terminal in Salt Lake City.
If the company goes ahead with the project, it will spend $1 million immediately and
another $1 million at the end of year 1. It will then receive net cash flows of $500,000 at
the end of years 2-5, and it expects to sell the property for $1 million at the end of year 6.
The company's cost of capital is 12 percent, and it used the MIRR criterion for capital
budgeting decisions. What is the project's MIRR? (MIRR 11.7%)
39. Mary was thinking about buying some little lambs and raising the to sell. the lambs cost
$5,000 (lamb prices are now abnormally low and may never be this low again) and Mary
thought hat she could sell several lambs each year and thus receive $3,500 per year for
the next three years. Mary, being the sophisticated investor that she was, calculated the
IRR on this investment and found it to be almost 49%. Mary thought that this seemed
very high, given that she normally earned about 15% on lamb investments. If Mary’s
returns are usually in the 15% range and will probably be about that in the further, can
you help Mary to make a more realistic estimate of the actual rate of return that she can
earn on her lamb investment over the next three years? Show and explain all of your
work. (MIRR 34.46%)