ESLSCA - FM 12

Multiple Choice: Problems

1)Edmondson Electric Systems is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that if a project's projected NPV is negative, it should be rejected.

WACC:                     10.00%

Year:                              0                  1                   2                   3          Cash flows:                        -$1,000           $500             $500             $500

a.      $243.43

b.      $255.60

c.       $268.38

d.      $281.80

e.      $295.89

2. .   Johnson Enterprises considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that if a project's projected NPV is negative, it should be rejected.

a.      $98.78

b.      $103.98

c.       $109.45

d.      $114.93

e.      $120.67

3.     Humboldt Inc. is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that if a project's projected NPV is negative, it should be rejected.

a.      $135.94

b.      $143.09

c.       $150.62

d.      $158.55

e.      $166.90

4.  Tucker Corp. is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be negative, in which case it will be rejected.

Year:                               0                 1             2             3       Cash flows:                        -$1,000         $450       $450       $450

a.      15.82%

b.      16.65%

c.       17.48%

d.      18.36%

e.      19.27%

5.       Levin Company is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be negative, in which case it will be rejected.

Year:                               0                 1             2             3              4       Cash flows:                        -$1,000         $400       $400       $400        $400

a.      15.94%

b.      17.71%

c.       19.68%

d.      21.86%

e.      24.05%

6.     Frye Foods is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be negative, in which case it will be rejected.

Year:                               0                 1             2             3              4              5       Cash flows:                        -$1,000         $325       $325       $325        $325        $325

a.      18.72%

b.      19.65%

c.       20.64%

d.      21.67%

e.      22.75%

7.     Wells Inc. is considering a project that has the following cash flow data. What is the project's payback?

Year:                               0                 1             2             3       Cash flows:                        -$1,000         $500       $500       $500

1. 1.62 years
2. 1.80 years
3. 2.00 years
4. 2.20 years
5. 2.42 years

8.       Wachowicz Inc. is considering two average-risk alternative ways of producing its patented polo shirts. Process S has a cost of $8,000 and will produce net cash flows of $5,000 per year for 2 years. Process L will cost $11,500 and will produce cash flows of $4,000 per year for 4 years. The company has a contract that requires it to produce the shirts for 4 years, but the patent will expire after 4 years, so the shirts will not be produced after the 4^th year. Inflation is expected to be zero during the next 4 years. If cash inflows occur at the end of each year, and if the cost of capital is 10%, by what amount will the better project increase the firm’s value?

a.      $677.69

b.      $1,098.89

c.       $1,179.46

d.      $1,237.76

e.      $1,312.31

9.     Van Auken Inc. is considering a project that has the following cash flows:

The company’s WACC is 10%. What are the project’s payback, internal rate of return, and net present value?

a.      Payback = 2.4, IRR = 10.00%, NPV = $600.

b.      Payback = 2.4, IRR = 21.22%, NPV = $260.

c.       Payback = 2.6, IRR = 21.22%, NPV = $300.

d.      Payback = 2.6, IRR = 21.22%, NPV = $260.

e.      Payback = 2.6, IRR = 24.12%, NPV = $300.

10. Adler Enterprises is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected.

WACC:                    10.00%

Year:                              0                 1             2              3       Cash flows:                        -$1,000         $450       $460        $470

a. $142.37

b. $149.49

c. $156.97

d. $164.82

e. $173.06

11.      Babcock Inc. is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected.

WACC:                    10.00%

Year:                              0                 1             2              3       Cash flows:                          -$950          $500       $400        $300

a. $54.62

b. $57.49

c. $60.52

d. $63.54

e. $66.72

12.      Rappaport Enterprises is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected.

WACC:                    10.00%

Year:                              0                1             2              3               4         Cash flows:                         -$1,000         $400       $405        $410         $415

a. $190.16

b. $211.29

c. $234.77

d. $260.85

e. $289.84

13.      Barry Company is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected.

a. $253.81

b. $282.01

c. $310.21

d. $341.23

e. $375.35

14.      Choi Computer Systems is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be less than the WACC (and even negative), in which case it will be rejected.

Year:                            0               1              2               3        Cash flows:                      -$1,000        $450        $470         $490

a. 13.89%

b. 15.43%

c. 17.15%

d. 19.05%

e. 20.96%

15.      Rentz Recreation Inc. is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be less than the WACC (and even negative), in which case it will be rejected.

Year:                            0               1              2               3                4        Cash flows:                        -$650         $250        $230         $210          $190

a. 14.04%

b. 15.44%

c. 16.99%

d. 18.69%

e. 20.56%

16.      Thompson Stores is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be less than the WACC (and even negative), in which case it will be rejected.

a. 11.16%

b. 12.40%

c. 13.78%

d. 15.16%

e. 16.68%

17.      ZumBahlen Inc. is considering the following mutually exclusive projects:

At what cost of capital will the net present value of the two projects be the same? (That is, what is the “crossover” rate?)

a. 15.68%

b. 16.15%

c. 16.74%

d. 17.33%

e. 17.80%

18.      Steve Hawke is a big football star who has been offered contracts by two different teams. The payments (in millions of dollars) under the two contracts are shown below:

Steve plans to accept the contract that provides him with the highest net present value. At what discount rate would he be indifferent between the two contracts?

a. 10.85%

b. 11.35%

c. 12.66%

d. 13.98%

e. 15.01%

19.      Aubey Inc. is considering two projects that have the following cash flows:

At what cost of capital would the two projects have the same net present value?

a. 4.73%

b. 5.85%

c. 6.70%

d. 7.50%

e. 8.20%

20.      Anderson Associates is considering two mutually exclusive projects that have the following cash flows:

At what cost of capital do the two projects have the same net present value? (That is, what is the crossover rate?)

a. 11.20%

b. 12.26%

c. 12.54%

d. 13.03%

e. 14.15%

21.      Flint Fruits is considering two equally risky, mutually exclusive projects, Projects A and B, that have the following cash flows:

At what WACC would the two projects have the same NPV? a. 9.56%

b. 10.33%

c. 11.21%

d. 12.55%

e. 14.49%

22.      Rivoli Roofing is considering mutually exclusive Projects A and B, which have the following cash flows:

Year

Project A Cash Flow

Project B Cash Flow

At what cost of capital would the two projects have the same net present value (NPV)?

a. 6.22%

b. 7.11%

c. 8.45%

d. 9.32%

e. 10.32%

23.      Edelman Electric Systems is considering a project that has the following cash flow and WACC data. What is the project's MIRR? Note that a project's projected MIRR can be less than the WACC (and even negative), in which case it will be rejected.

WACC:                    10.00%

Year:                            0               1              2               3        Cash flows:                        -$800         $350        $350         $350

a. 8.62%

b. 9.58%

c. 10.64%

d. 11.82%

e. 13.14%

24.      Hindelang Inc. is considering a project that has the following cash flow and WACC data. What is the project's MIRR? Note that a project's projected MIRR can be less than the WACC (and even negative), in which case it will be rejected.

WACC:                    10.00%

Year:                            0               1              2               3                4        Cash flows:                        -$900         $300        $320         $340          $360

a. 12.61%

b. 14.01%

c. 15.41%

d. 16.95%

e. 18.64%

25.      Stewart Associates is considering a project that has the following cash flow data. What is the project's payback?

Year:                            0               1              2              3              4              5       Cash flows:                      -$1,000        $300        $310        $320        $330        $340

1. 2.11 years
2. 2.34 years
3. 2.60 years
4. 2.89 years
5. 3.21 years

26.      Garvin Enterprises is considering a project that has the following cash flow and WACC data. What is the project's discounted payback?

1. 2.12 years
2. 2.35 years
3. 2.59 years
4. 2.85 years
5. 3.13 years

27.      Bey Bikes is considering a project that has the following cash flow and WACC data. What is the project's discounted payback?

WACC:                    10.00%

Year:                            0               1              2              3              4       Cash flows:                      -$1,000        $525        $485        $445        $405

1. 1.72 years
2. 1.92 years
3. 2.13 years
4. 2.36 years
5. 2.60 years

28.      Walker & Campsey wants to invest in a new computer system, and management has narrowed the choice to Systems A and B.

System A requires an up-front cost of $100,000, after which it generates positive after-tax cash flows of $60,000 at the end of each of the next

2 years. The system could be replaced every 2 years, and the cash inflows and outflows would remain the same.

System B also requires an up-front cost of $100,000, after which it would generate positive after-tax cash flows of $48,000 at the end of each of the next 3 years. System B can be replaced every 3 years, but each time the system is replaced, both the cash outflows and cash inflows would increase by 10%.

The company needs a computer system for 6 years, after which the current owners plan to retire and liquidate the firm. The company's cost of capital is 11%. What is the NPV (on a 6-year extended basis) of the system that adds the most value?

a. $17,298.30

b. $22,634.77

c. $31,211.52

d. $38,523.43

e. $46,143.21

29.      Mountain Fresh Water Company is considering two mutually exclusive machines. Machine A has an up-front cost of $100,000 (CF₀ = -100,000), and it produces positive after-tax cash inflows of $40,000 a year at the end of each of the next 6 years.

Machine B has an up-front cost of $50,000(CF₀ = -50,000), and it produces after-tax cash inflows of $30,000 a year at the end of the next 3 years. After 3 years, Machine B can be replaced at a cost of $55,000 (paid at t

= 3). The replacement machine will produce after-tax cash inflows of $32,000 a year for 3 years (inflows received at t = 4, 5, and 6).

The company’s cost of capital is 10.5%. What is the net present value (on a 6-year extended basis) of the more profitable machine?

a. $23,950

b. $41,656

c. $56,238

d. $62,456

e. $71,687

30.      A small manufacturer is considering two alternative machines. Machine A costs $1.0 million, has an expected life of 5 years, and generates

after-tax cash flows of $350,000 per year. At the end of 5 years, the salvage value of the machine is zero, but the company will be able to purchase another Machine A at a cost of $1.2 million. The second Machine A will generate after-tax cash flows of $375,000 a year for another 5 years, at which time its salvage value will again be zero.

Alternatively, the company can buy Machine B at a cost of $1.5 million today. Machine B will produce after-tax cash flows of $400,000 a year for 10 years, after which it will have an after-tax salvage value of

$100,000. Assume that the cost of capital is 12%. If the company chooses the machine that adds the most value to the firm, by how much will the company's value increase?

a. $347,802.00

b. $451,775.21

c. $633,481.19

d. $792,286.54

e. $841,357.66

31.      Pinkerton Truck Rental is considering two mutually exclusive engine development projects. The RPX design has an expected life of 4 years and projected cash inflows are $3.6 million at the end of each of the first 2 years and $1.8 million in each of the next 2 years. The RPB design is more flexible and has an 8-year life. The projected end-of- year flows from the RPB design are $2.4 million in each of the first two years and $2.0 million in each of the next six years. Both projects require an initial investment of $5.4 million, and Pinkerton's cost of capital is 12%. Frequent changes in engine technology make engine development risky, but Pinkerton feels that the basic designs can be refined and modified. Thus, Pinkerton often assumes that continuous replacements can be made as a project's life ends. What is the net present value (on an 8-year extended basis) of the project with the most value to the company?

1. $3.976 million
2. $4.325 million
3. $5.085 million
4. $5.211 million
5. $5.861 million

32.      Owens Mills Corp. is considering two mutually exclusive machines. Machine A requires an up-front expenditure at t = 0 of $450,000, it has an expected life of 2 years, and it will generate positive after-tax cash flows of $350,000 per year (all cash flows are realized at the end of the year) for 2 years. At the end of 2 years, the machine will have zero salvage value, but every two years the company can purchase a replacement machine with the same cost and identical cash inflows.

Alternatively, it can choose Machine B, which requires an expenditure of

$1 million at t = 0, has an expected life of 4 years, and will generate positive after-tax cash flows of $350,000 per year (all cash flows are realized at year end). At the end of 4 years, Machine B will have an after-tax salvage value of $100,000.

The cost of capital is 10%. What is the net present value (on an extended 4-year life) of the better machine?

a. $157,438

b. $177,754

c. $287,552

d. $355,508

e. $500,000

33.      Last month, Smith Systems Inc. decided to accept the project whose cash flows are shown below. However, before actually starting the project, the Federal Reserve took actions that lowered interest rates and therefore Smith's WACC. By how much did the change in the WACC affect the project's forecasted NPV? Assume that the Fed action does not affect the cash flows, and note that a project's projected NPV can be negative, in which case it should be rejected.

New WACC:      8.00%                         Old WACC: 11.00%

Year:                            0               1              2              3       Cash flows:                      -$1,000        $500        $500        $500

a. $57.18

b. $60.19

c. $63.36

d. $66.69

e. $70.03

34.       The Federal Reserve recently shifted its monetary policy, causing Lasik Vision's WACC to change. Lasik had recently analyzed the project whose cash flows are shown below. However, the CFO wants to reconsider this and all other proposed projects in view of the Fed action. How much did the changed WACC cause the forecasted NPV to change? Assume that the Fed action does not affect the cash flows, and note that a project's projected NPV can be negative, in which case it should be rejected.

New WACC:      7.00%                         Old WACC: 10.00%

Year:                            0               1              2              3       Cash flows:                      -$1,000        $500        $520        $540

a. $72.27

b. $75.88

c. $79.68

d. $83.66

e. $87.85

35. Sorenson Stores is considering a project that has the following cash flows:

Year                 Cash Flow

0                    CF₀ = ?

1                    $2,000

2                      3,000

3                      3,000

4                      1,500

The project has a payback of 2.5 years, and the firm’s cost of capital is 12%. What is the project’s NPV?

a. $577.68

b. $765.91

c. $1,049.80

d. $2,761.32

e. $3,765.91

:

36.       A firm is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO wants to use the IRR criterion, while the CFO favors the NPV method, and you were hired to advise the firm on the best procedure. If the CEO's preferred criterion is used, how much value will the firm lose as a result of this decision?

37.       Scanlon Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher IRR, how much value will be forgone? Note that under certain conditions choosing projects on the basis of the IRR will not cause any value to be lost because the one with the higher IRR will also have the higher NPV, so no value will be lost if the IRR method is used.

Answer: e

38.       Moerdyk & Co. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher IRR, how much value will be forgone? Note that under certain conditions choosing projects on the basis of the IRR will not cause any value to be lost because the one with the higher IRR will also have the higher NPV, i.e., no conflict will exist.

WACC:              12.00%

39.       Sadik Company is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and are not repeatable. If the decision is made by choosing the project with the higher IRR, how much value will be forgone? Note that under some conditions choosing projects on the basis of the IRR will cause

$0.00 value to be lost.

40.       Nast Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher MIRR rather than the one with the higher NPV, how much value will be forgone? Note that under some conditions choosing projects on the basis of the MIRR will cause $0.00 value to be lost.

41.       Yonan Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the shorter payback, some value may be forgone. How much value will be lost in this instance? Note that under some conditions choosing projects on

42.       Pappas Products is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO believes the IRR is the best selection criterion, while the CFO advocates the MIRR. If the decision is made by choosing the project with the higher IRR rather than the one with the higher MIRR, how much, if any, value will be forgone? Note that under some conditions the choice will have no effect on the value gained or lost.

WACC:              11.00%