Basics of Capital Budgeting

(Difficulty Levels: Easy, Easy/Medium, Medium, Medium/Hard, and Hard)
PART I !e" and Revised #arry$ver Pr$%lems and &uesti$ns

Multi'le #($ice: Pr$%lems
NPV (constant cash flows; 3 years) Answer: a EASY
1
. Thomson Electric Systems is considering a project that has the following
cash flow and WACC data. What is the project's NP! Note that a
project's projected NP can "e negati#e$ in which case it will "e
rejected.
WACC % 1&'
(ear) & 1 * +
Cash flows) ,-1$&&& -.&& -.&& -.&&
a. -*/+./+
". -*.1.*+
c. -*01.21
d. -*3*./0
e. -*12..+
NPV (constant cash flows; 4 years) Answer: c EASY
*
. 4lanchford Enterprises is considering a project that has the following
cash flow and WACC data. What is the project's NP! Note that a
rejected.
WACC % 1&'
(ear) & 1 * + /
Cash flows) ,-1$&&& -/3. -/3. -/3. -/3.
a. -/1*.10
". -/20.+1
c. -.&..02
d. -.12.&.
e. -.*/.3*
Chapter 11: The Basics of Capital Budgeting Page 107
#HAPTER ))
THE *A+I#+ ,- #APITAL *.D/ETI!/
NPV (constant cash flows; 5 years) Answer: e EASY
+
. Tapley 5ental Associates is considering a project that has the following
cash flow and WACC data. What is the project's NP! Note that a project's
projected NP can "e negati#e$ in which case it will "e rejected.
WACC % 1&'
(ear) & 1 * + / .
Cash flows) ,-1$&&& -+&& -+&& -+&& -+&& -+&&
a. -110.3+
". -1*+.1.
c. -1*1./3
d. -1+1.20
e. -1+3.*/
IRR (constant cash flows; 3 years) Answer: b EASY
/
cash flow data. What is the project's 677! Note that a project's
projected 677 can "e less than the WACC 8and e#en negati#e9$ in which
case it will "e rejected.
(ear) & 1 * +
Cash flows) ,-1$&&& -/.& -/.& -/.&
a. 10.*&'
". 10.0.'
c. 13.1&'
d. 13...'
e. 11.&&'
IRR (constant cash flows; 4 years) Answer: EASY
.
(ear) & 1 * + /
Cash flows) ,-1$&&& -/&& -/&& -/&& -/&&
a. 13.30'
". 12.13'
c. *&..0'
d. *1.10'
e. *+.&1'
Page 108 Chapter 11: The Basics of Capital Budgeting
IRR (constant cash flows; 5 years) Answer: a EASY
0
. Smithfield :oods is considering a project that has the following cash flow
data. What is the project's 677! Note that a project's projected 677 can
"e less than the WACC 8and e#en negati#e9$ in which case it will "e
rejected.
(ear) & 1 * + / .
Cash flows) ,-1$&&& -+.& -+.& -+.& -+.& -+.&
a. **.11'
". **.3/'
c. *+..1'
d. */.1/'
e. */.2+'
Paybac! (constant cash flows; 3 years) Answer: c EASY
3
cash flow data. What is the project's pay"ac;!
(ear) & 1 * +
Cash flows) ,-1$&&& -.&& -.&& -.&&
a. 1..& years
". 1.3. years
c. *.&& years
d. *.*. years
e. *..& years
Paybac! (nonconstant cash flows; 5 years) Answer: e EASY"#E$I%#
1
. Tapley 5ental Associates is considering a project that has the following
cash flow data. What is the project's pay"ac;!
(ear) & 1 * + / .
Cash flows) ,-1$&&& -+&& -+1& -+*& -++& -+/&
a. *.11 years
". *..& years
c. *.31 years
d. +.&. years
e. +.*1 years
NPV (&ne'en cash flows; 3 years) Answer: a EASY"#E$I%#
2
. Edison Electric Systems is considering a project that has the following
WACC % 1&'
(ear) & 1 * +
Cash flows) ,-1$&&& -/.& -/0& -/3&
a. -1/*.+3
". -1.1..2
c. -100..1
d. -13+.*0
e. -112.2/
NPV (&ne'en cash flows; 3 years) Answer: c EASY"#E$I%#
1&
. 7oc;mont 7ecreation 6nc. is considering a project that has the following
WACC % 1&'
(ear) & 1 * +
Cash flows) ,-1$&&& -/.& -//& -/+&
a. - 11.1/
". - 2*.*.
c. - 2..32
d. - 21./2
e. -1&*.0+
NPV (&ne'en cash flows; 4 years) Answer: e EASY"#E$I%#
11
. 7yngaert <edical Enterprises is considering a project that has the
following cash flow and WACC data. What is the project's NP! Note that a
rejected.
WACC % 1&'
(ear) & 1 * + /
Cash flows) ,-1$&&& -/&& -/&. -/1& -/1.
a. -*/1.*/
". -*...1+
c. -*01../
d. -*3/.31
e. -*12.1/
NPV (&ne'en cash flows; 5 years) Answer: b EASY"#E$I%#
1*
. 7ichards Enterprises is considering a project that has the following cash
flow and WACC data. What is the project's NP! Note that a project's
WACC % 1&'
(ear) & 1 * + / .
Cash flows) ,-1$&&& -/&& -+2. -+2& -+1. -+1&
a. -/31.3/
". -/1*.&1
c. -/2..&.
d. -.&3.21
e. -.13.2+
IRR (&ne'en cash flows; 3 years) Answer: EASY"#E$I%#
1+
(ear) & 1 * +
Cash flows) ,-1$&&& -/.& -/3& -/2&
a. 10.3+'
". 13.//'
c. 11.12'
d. 12.&.'
e. *&.+3'
IRR (&ne'en cash flows; 4 years) Answer: a EASY"#E$I%#
1/
(ear) & 1 * + /
Cash flows) ,-1$&&& -*.& -*+& -*1& -12&
a. ,..1.'
". ,+.//'
c. ,1.13'
d. *.*.'
e. +.3*'
IRR (&ne'en cash flows; 5 years) Answer: c EASY"#E$I%#
1.
. Sam's Stores Enterprises is considering a project that has the following
WACC % 1&'
(ear) & 1 * + / .
Cash flows) ,-1$&&& -+&& -*2. -*2& -*1. -*1&
a. 1*.&&'
". 1+.&&'
c. 1/.&&'
d. 1..&&'
e. 10.&&'
$(sco&nte )aybac! (constant cash flows; 3 years) Answer: b #E$I%#
10
cash flow and WACC data. What is the project's disco=nted pay"ac;!
WACC % 1&'
(ear) & 1 * +
Cash flows) ,-1$&&& -.&& -.&& -.&&
a. *.&1 years
". *.+. years
c. *.0. years
d. *.1/ years
e. +.13 years
$(sco&nte )aybac! (nonconstant cash flows; 4 years) Answer: #E$I%#
13
. 7eynolds 4i;es is considering a project that has the following cash flow
and WACC data. What is the project's disco=nted pay"ac;!
WACC % 1&'
(ear) & 1 * + /
Cash flows) ,-1$&&& -.*. -/1. -//. -/&.
a. 1.00 years
". 1.1* years
c. *.&+ years
d. *.+0 years
e. *./1 years
#IRR (&ne'en cash flows; 3 years) Answer: e #E$I%#
11
cash flow and WACC data. What is the project's <677! Note that a
project's projected <677 can "e less than the WACC 8and e#en negati#e9$
in which case it will "e rejected.
WACC % 1&'
(ear) & 1 * +
Cash flows) ,-1$&&& -+.& -+3& -+2&
a. /.2&'
". ..11'
c. ..3*'
d. 0.*+'
e. 0.13'
#IRR (&ne'en cash flows; 4 years) Answer: b #E$I%#
12
cash flow and WACC data. What is the project's <677! Note that a
project's projected <677 can "e less than the WACC 8and e#en negati#e9$
in which case it will "e rejected.
WACC % 1&'
(ear) & 1 * + /
Cash flows) ,-2&& -+&& -+*& -+/& -+0&
a. 1+.++'
". 1/.&1'
c. 1..02'
d. 10.+.'
e. 13.11'
NPV 's IRR (constant cash flows; 3 years) Answer: #E$I%#
*&
. >ast month$ Wong Systems 6nc. decided to accept the project whose cash
flows are shown "elow. ?owe#er$ "efore act=ally starting the project$ the
:ederal 7eser#e too; actions that changed interest rates and Wong's WACC.
4y how m=ch did the change in the WACC affect the project's forecasted
NP! Ass=me that the :ed action will not affect the cash flows$ and note
that a project's projected NP can "e negati#e$ in which case it sho=ld "e
rejected.
@ld WACC % 1&' New WACC % .'
(ear) & 1 * +
Cash flows) ,-1$&&& -.&& -.&& -.&&
a. - 11.03
". - 2*.10
c. -1&/.2+
d. -111.12
e. -1*/.11
NPV 's IRR (nonconstant cash flows; 3 years) Answer: a #E$I%#
*1
. The :ederal 7eser#e recently shifted its monetary policy$ ca=sing >asi;
ision's WACC to change. >asi; had recently analyAed the project whose
cash flows are shown "elow. ?owe#er$ the C:@ wants to reconsider this and
all other proposed projects in #iew of the :ed action. ?ow m=ch did the
changed WACC ca=se the forecasted NP to change! Ass=me that the :ed
action will not affect the cash flows$ and note that a project's projected
NP can "e negati#e$ in which case it sho=ld "e rejected.
@ld WACC % 1&' New WACC % 1'
(ear) & 1 * +
Cash flows) ,-1$&&& -.&& -.*& -./&
a. -/3.//
". -.2./.
c. -01..3
d. -3/.10
e. -1/.10
NPV 's IRR (s(*e (fferences) Answer: c #E$I%#"+AR$
**
. Pettway 6nc. is considering Projects S and >$ whose cash flows are shown
"elow. These projects are m=t=ally eBcl=si#e$ eC=ally ris;y$ and not
repeata"le. 6f the decision is made "y choosing the project with the
higher 677$ how m=ch #al=e will "e forgone! Note that =nder some
conditions choosing projects on the "asis of the 677 will ca=se -&.&&
#al=e to "e lost.
WACC % 1*'
(ear) & 1 * + /
C:
S
) ,-1$&*. -+3. -+1& -+1. -+2&
C:
>
) ,-*$1.+ -3.& -3.2 -301 -333
a. -1...3
". -*1./2
c. -*3..*
d. -++.02
e. -+3.+2
NPV 's IRR ((fferent t(,(n- )atterns) Answer: e #E$I%#"+AR$
*+
. Porter D Co. is considering Projects S and >$ whose cash flows are shown
higher 677$ how m=ch #al=e will "e forgone! Note that =nder some
#al=e to "e lost.
WACC % 1&'
(ear) & 1 * + /
C:
S
) ,-1$&*. -0.& -/.& -*.& - .&
C:
>
) ,-1$&*. -1&& -+&& -.&& -3&&
a. ,-0.2+
". ,-*.*0
c. -&.&&
d. -+.+1
e. -3.1*
NPV 's IRR ((fferent t(,(n- )atterns) Answer: a #E$I%#"+AR$
*/
. 7itter 5ental EC=ipment is considering Projects S and >$ whose cash flows
are shown "elow. These projects are m=t=ally eBcl=si#e$ eC=ally ris;y$
and are not repeata"le. 6f the decision is made "y choosing the project
with the higher 677$ how m=ch #al=e will "e forgone! Note that =nder some
#al=e to "e lost.
WACC % 1&..'
(ear) & 1 * + /
C:
S
) ,-1$&.& -0.& -0.&
C:
>
) ,-1$&.& -/&& -/&& -/&& -/&&
a. - &.&&
". -1++.33
c. -123./1
d. -*/0.11
e. -+&.../
NPV 's #IRR (s(*e (fferences) Answer: #E$I%#"+AR$
*.
. Precision Prod=cts is considering Projects S and >$ whose cash flows are
shown "elow. These projects are m=t=ally eBcl=si#e$ eC=ally ris;y$ and
not repeata"le. 6f the decision is made "y choosing the project with the
higher <677$ how m=ch #al=e will "e forgone! Note that =nder some
conditions choosing projects on the "asis of the <677 will ca=se -&.&&
#al=e to "e lost.
WACC % 1&'
(ear) & 1 * + /
C:
S
) ,-1$&&& -+3. -+3. -+3. -+3.
C:
>
) ,-*$&1& -3*. -3*. -3*. -3*.
a. - 31.03
". - 1..0/
c. - 2&.+2
d. - 22./.
e. -1&3.+1
NPV 's )aybac! Answer: #E$I%#"+AR$
*0
. Pettway 6nc. is considering Projects S and >$ whose cash flows are shown
shorter pay"ac;$ some #al=e may "e forgone. ?ow m=ch #al=e will "e lost
in this instance! Note that =nder some conditions choosing projects on
the "asis of the shorter pay"ac; will not ca=se #al=e to "e lost.
WACC % 1+'
(ear) & 1 * + /
C:
S
) ,-1$&&& -/&& -/&& -/&& -/&&
C:
>
) ,-*$1&& -1&& -1&& -1&& -1&&
a. -...10
". -00./*
c. -31.32
d. -12.32
e. -20.10
NPV 's IRR Answer: a +AR$
*3
. 7oss 6nc.'s C:@ thin;s the company sho=ld rely primarily on the NP
method$ "=t the president prefers the 677$ so decisions are "ased on the
677. The C:@ wants yo= to show the president that at times decisions
"ased on the 677 res=lt in a red=ction in the company's #al=e relati#e to
its #al=e if the NP criterion were =sed. The C:@ then as;ed yo= to
analyAe two projects that the company is now considering$ S and >$ whose
cash flows are shown "elow. These projects are m=t=ally eBcl=si#e$
eC=ally ris;y$ and not repeata"le. 6f the decision is made "y choosing
the project with the higher 677$ how m=ch #al=e will 7oss "e forgoing!
Note that at times the project with the higher 677 will also ha#e the
higher NP$ and in these cases no #al=e will "y lost "y relying on the
677.
WACC % 1&'
(ear) & 1 * + /
C:
S
) ,-1$&*. -0.& -0.&
C:
>
) ,-1$&*. -/&& -/&& -/&& -/&&
a. - &.&&
". -1*../3
c. -1+2.1.
d. -1/+.20
e. -1.3.&1
NPV an )aybac! Answer: e +AR$
*1
. (o= m=st find the pay"ac; for a project$ and yo= ha#e misplaced some of
the information that yo= were gi#en. (o= ;now that the project will
generate positi#e cash flows of -0&$&&& per year at the end of each of the
neBt . years$ that its NP is -3.$&&&$ and that the companyEs WACC is 1&'.
What is the projectEs reg=lar pay"ac;! ?int) (o= m=st first find the
project's cost$ then =se it to find the pay"ac;.
a. *.11 years
". *.*3 years
c. *.+1 years
d. *./. years
e. *../ years
Multi'le #($ice: #$nce'tual
Note to Professors: We designated most of these questions as being MEDIUM or HARD.
Howeer! their diffi"u#t$ as seen b$ students wi## de%end on &'( what was dis"ussed in "#ass and
&)( how #ong students hae to answer the questions. If time is not an issue! then man$ of the
questions shou#d be "#assified as one not"h easier than our designation. *o! "onsider the
amount of time students hae when se#e"ting questions for an e+am.
A#so! it is E,-REME./ HE.P0U. for students to draw an NP1 %rofi#e when answering a
number of the questions. We re"ommend %ointing this out in "#ass. Drawing these %rofi#es ta2es
time! but it is a ne"essar$ ste% for man$ %eo%#e if the$ are to answer the questions "orre"t#$.
-his is true een for students who understand the "on"e%ts.
Ran!(n- ,ethos Answer: b EASY
*2
. Ass=me a project has normal cash flows. All else eC=al$ which of the
following statements is C@77ECT!
a. The projectEs 677 increases as the WACC declines.
". The projectEs NP increases as the WACC declines.
c. The projectEs <677 is =naffected "y changes in the WACC.
d. The projectEs reg=lar pay"ac; increases as the WACC declines.
e. The projectEs disco=nted pay"ac; increases as the WACC declines.
Ran!(n- ,ethos Answer: EASY
+&
. Which of the following statements is C@77ECT!
a. The internal rate of ret=rn method 86779 is generally regarded "y
academics as "eing the "est single method for e#al=ating capital
"=dgeting projects.
". The pay"ac; method is generally regarded "y academics as "eing the "est
single method for e#al=ating capital "=dgeting projects.
c. The disco=nted pay"ac; method is generally regarded "y academics as
"eing the "est single method for e#al=ating capital "=dgeting projects.
d. The net present #al=e method 8NP9 is generally regarded "y academics
as "eing the "est single method for e#al=ating capital "=dgeting
projects.
e. The modified internal rate of ret=rn method 8<6779 is generally
regarded "y academics as "eing the "est single method for e#al=ating
capital "=dgeting projects.
Ran!(n- ,ethos: )aybac! Answer: EASY
+1
a. The reg=lar pay"ac; method recogniAes all cash flows o#er a projectEs
life.
". The disco=nted pay"ac; method recogniAes all cash flows o#er a
projectEs life$ and it also adj=sts these cash flows to acco=nt for the
time #al=e of money.
c. The reg=lar pay"ac; method was$ years ago$ widely =sed$ "=t #irt=ally
no companies e#en calc=late the pay"ac; today.
d. The reg=lar pay"ac; is =sef=l as an indicator of a projectEs liC=idity
"eca=se it gi#es managers an idea of how long it will ta;e to reco#er
the f=nds in#ested in a project.
e. The reg=lar pay"ac; does not consider cash flows "eyond the pay"ac;
year$ "=t disco=nted pay"ac; o#ercomes this defect.
Ran!(n- ,ethos: IRR Answer: e EASY
+*
a. @ne defect of the 677 method is that it does not ta;e acco=nt of cash
flows o#er a projectEs f=ll life.
". @ne defect of the 677 method is that it does not ta;e acco=nt of the
time #al=e of money.
c. @ne defect of the 677 method is that it does consider the time #al=e of
money.
d. @ne defect of the 677 method is that it #al=es a dollar recei#ed today
the same as a dollar that will not "e recei#ed =ntil some time in the
f=t=re.
e. @ne defect of the 677 method is that it ass=mes that the cash flows to
"e recei#ed from a project can "e rein#ested at the 677 itself$ and
that ass=mption is often not #alid.
Nor,al 's. nonnor,al cash flows Answer: e EASY
++
a. 6f a project has FnormalG cash flows$ then its 677 m=st "e positi#e.
". 6f a project has FnormalG cash flows$ then its <677 m=st "e positi#e.
c. 6f a project has FnormalG cash flows$ then it will ha#e eBactly two
real 677s.
d. The definition of FnormalG cash flows is that the cash flow stream has
one or more negati#e cash flows followed "y a stream of positi#e cash
flows and then one negati#e cash flow at the end of the projectEs life.
e. 6f a project has FnormalG cash flows$ then it can ha#e only one real
677$ whereas a project with FnonnormalG cash flows might ha#e more than
one real 677.
Nor,al 's. nonnor,al cash flows Answer: a EASY
+/
a. Projects with FnormalG cash flows can ha#e only one real 677.
". Projects with FnormalG cash flows can ha#e two or more real 677s.
c. Projects with FnormalG cash flows m=st ha#e two changes in the sign of
the cash flows$ e.g.$ from negati#e to positi#e to negati#e. 6f there
are more sign changes$ then the cash flow stream is Fnonnormal.G
d. The Fm=ltiple 677 pro"lemG can arise if a projectEs cash flows are
Fnormal.G
e. Projects with FnonnormalG cash flows are almost ne#er enco=ntered in
the real world.
NPV Answer: c EASY
+.
. Which of the following statements is C@77ECT! Ass=me that the project
"eing considered has normal cash flows$ with one o=tflow followed "y a
series of inflows.
a. A projectEs NP is fo=nd "y compo=nding the cash inflows at the 677 to
find the terminal #al=e 8T9$ then disco=nting the T at the WACC.
". The lower the WACC =sed to calc=late it$ the lower the calc=lated NP
will "e.
c. 6f a projectEs NP is less than Aero$ then its 677 m=st "e less than
the WACC.
d. 6f a projectEs NP is greater than Aero$ then its 677 m=st "e less than
Aero.
e. The NP of a relati#ely low ris; project sho=ld "e fo=nd =sing a
relati#ely high WACC.
Paybac! Answer: b EASY
+0
series of inflows.
a. The longer a projectEs pay"ac; period$ the more desira"le the project
is normally considered to "e "y this criterion.
". @ne draw"ac; of the pay"ac; criterion for e#al=ating projects is that
this method does not properly acco=nt for the time #al=e of money.
c. 6f a projectEs pay"ac; is positi#e$ then the project sho=ld "e rejected
"eca=se it m=st ha#e a negati#e NP.
d. The reg=lar pay"ac; ignores cash flows "eyond the pay"ac; period$ "=t
the disco=nted pay"ac; method o#ercomes this pro"lem.
e. 6f a company =ses the same reC=irement to e#al=ate all projects$ say it
reC=ires a pay"ac; of / years or less$ then the company will tend to
reject projects with relati#ely short li#es and accept long,li#ed
projects$ and this will ca=se its ris; to increase o#er time.
Paybac! Answer: b EASY
+3
series of inflows.
a. The shorter a projectEs pay"ac; period$ the less desira"le the project
is normally considered to "e "y this criterion.
". @ne draw"ac; of the pay"ac; criterion for e#al=ating projects is that
this method does not ta;e acco=nt of cash flows "eyond the pay"ac;
period.
c. 6f a projectEs pay"ac; is positi#e$ then the project sho=ld "e accepted
"eca=se it m=st ha#e a positi#e NP.
d. The reg=lar pay"ac; ignores cash flows "eyond the pay"ac; period$ "=t
the disco=nted pay"ac; method o#ercomes this pro"lem.
e. @ne draw"ac; of the disco=nted pay"ac; is that this method does not
consider the time #al=e of money$ while the reg=lar pay"ac; o#ercomes
this draw"ac;.
IRR Answer: EASY
+1
series of inflows.
a. A projectEs reg=lar 677 is fo=nd "y compo=nding the cash inflows at the
WACC to find the terminal #al=e 8T9$ then disco=nting this T at the
WACC.
". A projectEs reg=lar 677 is fo=nd "y disco=nting the cash inflows at the
WACC to find the present #al=e 8P9$ then compo=nding this P to find
the 677.
c. 6f a projectEs 677 is greater than the WACC$ then its NP m=st "e
negati#e.
d. To find a projectEs 677$ we m=st sol#e for the disco=nt rate that
ca=ses the P of the inflows to eC=al the P of the projectEs costs.
e. To find a projectEs 677$ we m=st find a disco=nt rate that is eC=al to
the WACC.
IRR Answer: EASY
+2
series of inflows.
a. A projectEs reg=lar 677 is fo=nd "y compo=nding the initial cost at the
WACC to find the terminal #al=e 8T9$ then disco=nting the T at the
WACC.
". A projectEs reg=lar 677 is fo=nd "y compo=nding the cash inflows at the
WACC to find the present #al=e 8P9$ then disco=nting to find the 677.
c. 6f a projectEs 677 is less than the WACC$ then its NP will "e
positi#e.
d. A projectEs 677 is the disco=nt rate that ca=ses the P of the inflows
to eC=al the projectEs cost.
e. 6f a projectEs 677 is positi#e$ then its NP m=st also "e positi#e.
Ran!(n- ,ethos: NPV Answer: e #E$I%#
/&
a. The NP method was once the fa#orite of academics and "=siness
eBec=ti#es$ "=t today most a=thorities regard the <677 as "eing the
"est indicator of a projectEs profita"ility.
". 6f the cost of capital is red=ced$ this red=ces a projectEs NP.
c. The NP method is regarded "y most academics as "eing the "est
indicator of a projectEs profita"ility$ hence academics recommend that
firms =se only this one method.
d. A projectEs NP depends on the total amo=nt of cash flows the project
prod=ces$ "=t "eca=se the cash flows are disco=nted at the WACC$ it
does not matter if the cash flows occ=r early or late in the projectEs
life.
e. The NP and 677 methods may gi#e different recommendations regarding
which of two m=t=ally eBcl=si#e projects sho=ld "e accepted$ "=t they
always gi#e the same recommendation regarding the accepta"ility of a
normal$ independent project.
Ran!(n- ,ethos: NPV Answer: b #E$I%#
/1
a. @ne ad#antage of the NP o#er the 677 method is that NP ta;es acco=nt
of cash flows o#er a projectEs f=ll life whereas 677 does not.
". @ne ad#antage of the NP o#er the 677 is that NP ass=mes that cash
flows will "e rein#ested at the WACC whereas 677 ass=mes that cash
flows are rein#ested at the 677$ and the NPEs ass=mption is generally
more li;ely to "e appropriate.
c. @ne ad#antage of the NP o#er the <677 method is that NP ta;es acco=nt
of cash flows o#er a projectEs f=ll life whereas <677 does not.
d. @ne ad#antage of the NP o#er the <677 method is that NP disco=nts
cash flows whereas the <677 is "ased on =ndisco=nted cash flows.
e. Since cash flows =nder the 677 and <677 are "oth disco=nted at the same
rate 8the WACC9$ these two methods always ran; m=t=ally eBcl=si#e
projects in the same order.
NPV )rof(les Answer: EASY"#E$I%#
/*
a. An NP profile graph shows how a projectEs pay"ac; #aries as the cost
of capital changes.
". An NP profile graph for a project normally shows a positi#e 8=pward9
slope as the life of the project increases.
c. An NP profile graph is designed to gi#e decision ma;ers an idea a"o=t
how a projectEs ris; #aries with its life.
d. An NP profile graph is designed to gi#e decision ma;ers an idea a"o=t
how a projectEs contri"=tion to the firmEs #al=e #aries with the cost
of capital.
e. We cannot draw a projectEs NP profile =nless we ;now the appropriate
WACC for =se in e#al=ating the projectEs NP.
Ran!(n- confl(cts Answer: a #E$I%#
/+
a. The NP method ass=mes that cash flows will "e rein#ested at the WACC$
while the 677 method ass=mes rein#estment at the 677.
". The NP method ass=mes that cash flows will "e rein#ested at the ris;,
free rate$ while the 677 method ass=mes rein#estment at the 677.
c. The NP method ass=mes that cash flows will "e rein#ested at the WACC$
while the 677 method ass=mes rein#estment at the ris;,free rate.
d. The NP method does not consider all rele#ant cash flows$ partic=larly$
cash flows "eyond the pay"ac; period.
e. The 677 method does not consider all rele#ant cash flows$ partic=larly$
cash flows "eyond the pay"ac; period.
Paybac! )er(o Answer: #E$I%#
//
. The reg=lar pay"ac; method has a n=m"er of disad#antages. Which of the
following items is N@T a disad#antage of this method!
a. >ac; of an o"jecti#e$ mar;et,determined "enchmar; for ma;ing decisions.
". 6gnores cash flows "eyond the pay"ac; period.
c. 5oes not directly acco=nt for the time #al=e of money.
d. 5oes not pro#ide any indication regarding a projectEs liC=idity.
e. 5oes not directly acco=nt for differences in ris; among projects.
NPV Answer: b #E$I%#
/.
series of inflows.
a. A projectEs NP is generally fo=nd "y compo=nding the cash inflows at
the WACC to find the terminal #al=e 8T9$ then disco=nting the T at
the 677 to find its P.
". The higher the WACC =sed to calc=late the NP$ the lower the calc=lated
NP will "e.
c. 6f a projectEs NP is greater than Aero$ then its 677 m=st "e less than
the WACC.
d. 6f a projectEs NP is greater than Aero$ then its 677 m=st "e less than
Aero.
e. The NPs of relati#ely ris;y projects sho=ld "e fo=nd =sing relati#ely
low WACCs.
NPV an IRR Answer: e #E$I%#
/0
series of inflows.
a. 6f Project A has a higher 677 than Project 4$ then Project A m=st ha#e
the lower NP.
". 6f Project A has a higher 677 than Project 4$ then Project A m=st also
ha#e a higher NP.
c. The 677 calc=lation implicitly ass=mes that all cash flows are
rein#ested at the WACC.
d. The 677 calc=lation implicitly ass=mes that cash flows are withdrawn
from the "=siness rather than "eing rein#ested in the "=siness.
e. 6f a project has normal cash flows and its 677 eBceeds its WACC$ then
the projectEs NP m=st "e positi#e.
NPV )rof(les Answer: a #E$I%#
/3
. Projects A and 4 ha#e identical eBpected li#es and identical initial cash
o=tflows 8costs9. ?owe#er$ most of one projectEs cash flows come in the
early years$ while most of the other projectEs cash flows occ=r in the
later years. The two NP profiles are gi#en "elow)
Which of the following statements is C@77ECT!
a. <ore of Project AEs cash flows occ=r in the later years.
". <ore of Project 4Es cash flows occ=r in the later years.
c. We m=st ha#e information on the cost of capital in order to determine
which project has the larger early cash flows.
d. The NP profile graph is inconsistent with the statement made in the
pro"lem.
e. The crosso#er rate$ i.e.$ the rate at which Projects A and 4 ha#e the
same NP$ is greater than either projectEs 677.
NPV )rof(les Answer: b #E$I%#
/1
. Projects S and > each ha#e an initial cost of -1&$&&&$ followed "y a
series of positi#e cash inflows. Project SEs =ndisco=nted net cash flows
total to -*&$&&&$ while >Es total =ndisco=nted flows are -+&$&&&. At a
WACC of 1&'$ the two projects ha#e identical NPs. Which projectEs NP is
more sensiti#e to changes in the WACC!
a. Project S.
". Project >.
c. 4oth projects are eC=ally sensiti#e to changes in the WACC since their
NPs are eC=al at all costs of capital.
d. Neither project is sensiti#e to changes in the disco=nt rate$ since
"oth ha#e NP profiles that are horiAontal.
e. The sol=tion cannot "e determined "eca=se the pro"lem gi#es =s no
information that can "e =sed to determine the projectsE relati#e 677s.
NP
8-9
A
/
r 8'9
NPV0 IRR0 an #IRR Answer: a #E$I%#
/2
a. 6f a project with normal cash flows has an 677 greater than the WACC$
the project m=st ha#e a positi#e NP.
". 6f Project AEs 677 eBceeds Project 4Es$ then A m=st ha#e the higher
NP.
c. A projectEs <677 can ne#er eBceed its 677.
d. 6f a project with normal cash flows has an 677 less than the WACC$ the
project m=st ha#e a positi#e NP.
e. 6f the NP is negati#e$ the 677 m=st also "e negati#e.
NPV0 IRR0 an #IRR Answer: c #E$I%#
.&
a. The <677 and NP decision criteria ne#er conflict.
". The 677 method can ne#er "e s="ject to the m=ltiple 677 pro"lem$ while
the <677 method can "e.
c. @ne reason why some people prefer the <677 method to the 677 method is
that the <677 is "ased on a more reasona"le ass=mption a"o=t
rein#estment rates than the 677 method.
d. The higher the WACC$ the lower the disco=nted pay"ac; period.
e. The <677 method ass=mes that cash flows are rein#ested at the crosso#er
rate.
#(scellaneo&s conce)ts Answer: a #E$I%#
.1
a. The 677 method appeals to some managers "eca=se it gi#es an estimate of
the rate of ret=rn on projects rather than a dollar amo=nt li;e the NP
method pro#ides.
". The disco=nted pay"ac; method eliminates all of the pro"lems associated
with the pay"ac; method.
c. When e#al=ating independent projects$ the NP and 677 methods often
yield conflicting res=lts.
d. To find the <677$ we disco=nt the T at the 677.
e. A projectEs NP profile m=st intersect the B,aBis at the projectEs
WACC.
#(scellaneo&s conce)ts Answer: a #E$I%#
.*
. Projects C and 5 are m=t=ally eBcl=si#e and ha#e normal cash flows.
Project C has a higher NP if the WACC is less than 1*'$ whereas Project 5
has a higher NP if the WACC eBceeds 1*'. Which of the following
statements is C@77ECT!
a. Project 5 has a higher 677.
". Project 5 is pro"a"ly larger in scale than Project C.
c. Project C pro"a"ly has a faster pay"ac;.
d. Project C has a higher 677.
e. The crosso#er rate "etween the two projects is "elow 1*'.
NPV0 IRR0 an #IRR Answer: c #E$I%#
.+
a. :or independent projects$ the NP$ 677$ <677$ and disco=nted pay"ac;
8=sing a pay"ac; reC=irement of + or less years9 methods always lead to
the same acceptHreject decisions for a gi#en project.
". :or m=t=ally eBcl=si#e projects$ the NP and <677 methods ne#er
conflict$ "=t their res=lts co=ld conflict with the disco=nted pay"ac;
and the reg=lar 677 methods.
c. <=ltiple 677s can eBist$ "=t not m=ltiple <677s. This is one reason
for fa#oring the <677 o#er the 677.
d. 6f a firm =ses the disco=nted pay"ac; method with a reC=ired pay"ac; of
/ years$ then it will accept more projects than if it =sed as its
c=toff criterion a reg=lar pay"ac; of / years.
e. The percentage difference "etween the <677 and the 677 is eC=al to the
projectEs WACC.
NPV0 IRR0 an #IRR Answer: e #E$I%#
./
a. :or a project with normal cash flows$ any change in the WACC will
change "oth the NP and the 677.
". To find the <677$ we first compo=nd cash flows at the reg=lar 677 to
find the T$ and then we disco=nt the T at the WACC to find the P.
c. The NP and 677 methods "oth ass=me cash flows can "e rein#ested at the
WACC. ?owe#er$ the <677 method ass=mes rein#estment at the <677
itself.
d. 6f two projects ha#e the same cost$ and if their NP profiles cross$
then the project with the higher 677 pro"a"ly has more of its cash
flows coming in the later years.
e. 6f two projects ha#e the same cost$ and if their NP profiles cross$
then the project with the lower 677 pro"a"ly has more of its cash flows
coming in the later years.
#&lt()le IRRs Answer: #E$I%#
..
a. :or a project to ha#e more than one 677$ then "oth 677s m=st "e greater
than the WACC.
". 6f two projects are m=t=ally eBcl=si#e$ then they are li;ely to ha#e
m=ltiple 677s.
c. 6f a project is independent$ then it cannot ha#e m=ltiple 677s.
d. <=ltiple 677s can only occ=r if the signs of the cash flows change more
than once.
e. 6f a project has two 677s$ then the one that is closest to the #ertical
aBis is the one that sho=ld "e accepted.
NPV )rof(les Answer: a #E$I%#"+AR$
.0
. Projects S and > are eC=ally ris;y$ m=t=ally eBcl=si#e projects with
normal cash flows. Project S has an 677 of 1.'$ while Project >Es 677 is
1*'. The two projects ha#e the same NP when the WACC is 3'. Which of the
a. 6f the WACC is 1&'$ "oth projects will ha#e positi#e NPs.
". 6f the WACC is 0'$ Project S will ha#e the higher NP.
c. 6f the WACC is 1+'$ Project S will ha#e the lower NP.
d. 6f the WACC is 1&'$ "oth projects will ha#e a negati#e NP.
e. Project SEs NP is more sensiti#e to changes in WACC than Project >Es.
NPV )rof(les Answer: e #E$I%#"+AR$
.3
. Sacramento Paper is considering two eC=ally ris;y$ m=t=ally eBcl=si#e
projects$ and "oth projects ha#e normal cash flows. Project A has an 677
of 11'$ while Project 4 has an 677 of 1/'. When the WACC is 1'$ the
projects ha#e the same NP. Ii#en this information$ which of the
a. 6f the WACC is 1+'$ Project AEs NP will "e higher than Project 4Es.
". 6f the WACC is 2'$ Project AEs NP will "e higher than Project 4Es.
c. 6f the WACC is 0'$ Project 4Es NP will "e higher than Project AEs.
d. 6f the WACC goes o#er 1/'$ Project AEs 677 will eBceed Project 4Es.
e. 6f the WACC is 2'$ Project 4Es NP will "e higher than Project AEs.
NPV )rof(les Answer: b #E$I%#"+AR$
.1
. (o= are considering two m=t=ally eBcl=si#e$ eC=ally ris;y$ projects. 4oth
projects ha#e 677s that eBceed the WACC that is =sed to e#al=ate "oth of
them. Which of the following statements is C@77ECT! Ass=me that the
projects "eing considered ha#e normal cash flows$ with one o=tflow
followed "y a series of inflows.
a. 6f the two projectEs NP profiles do not cross$ then there will "e a
sharp conflict as to which one sho=ld "e selected.
". 6f the cost of capital is greater than the crosso#er rate$ then the 677
and the NP criteria will not res=lt in a conflict "etween the
projects. @ne project will ran; higher "y "oth criteria.
c. 6f the cost of capital is less than the crosso#er rate$ then the 677
and the NP criteria will not res=lt in a conflict "etween the
projects. @ne project will ran; higher "y "oth criteria.
d. :or a conflict to eBist "etween NP and 677$ the initial in#estment
cost of one project m=st eBceed the cost of the other.
e. :or a conflict to eBist "etween NP and 677$ one project m=st ha#e an
increasing stream of cash flows o#er time while the other has a
decreasing stream. 6f "oth sets of cash flows are increasing or
decreasing$ then it wo=ld "e impossi"le for a conflict to eBist$ e#en
if one project is larger than the other.
NPV )rof(les Answer: b #E$I%#"+AR$
.2
. Project JEs 677 is 12'$ and Project (Es 677 is 13'. The projects ha#e the
same ris; and the same li#es$ and their cash flows are constant o#er their
li#es. 6f the WACC is 1&'$ Project ( has a higher NP than Project J.
Ii#en this information$ which of the following statements is C@77ECT!
a. The crosso#er rate "etween the two projects m=st "e less than 1&'.
". The crosso#er rate "etween the two projects m=st "e greater than 1&'.
c. 6f the WACC is 1'$ Project J will ha#e the higher NP.
d. 6f the WACC is 11'$ Project ( will ha#e the higher NP.
e. Project J is larger in the sense that it has the higher initial cost.
NPV )rof(les Answer: e +AR$
0&
. Ass=me that Projects S and > "oth ha#e normal cash flows$ and those cash
flows are not affected "y the WACC =sed to e#al=ate them. <oreo#er$ the
projects ha#e the same ris;$ hence "oth are e#al=ated with the same WACC$
1&'. ?owe#er$ Project S has a higher 677 than Project >. Which of the
a. Project S m=st ha#e a higher NP than Project >.
". 6f Project S has a positi#e NP$ Project > m=st also ha#e a positi#e NP.
c. 6f the WACC falls$ each projectEs 677 will increase.
d. 6f the WACC increases$ each projectEs 677 will decrease.
e. 6f Projects S and > ha#e the same NP at the c=rrent WACC$ 1&'$ then
Project >$ the one with the lower 677$ wo=ld ha#e a higher NP if the
WACC =sed to e#al=ate the projects declined.
NPV )rof(les Answer: c +AR$
01
. Which of the following statements is C@77ECT! Ass=me that all projects
"eing considered ha#e normal cash flows and are eC=ally ris;y.
a. 6f a projectEs 677 is eC=al to its WACC$ then =nder all reasona"le
conditions$ the projectEs NP m=st "e negati#e.
". 6f a projectEs 677 is eC=al to its WACC$ then =nder all reasona"le
conditions$ the projectEs 677 m=st "e negati#e.
c. 6f a projectEs 677 is eC=al to its WACC$ then =nder all reasona"le
conditions$ the projectEs NP m=st "e Aero.
d. There is no necessary relationship "etween a projectEs 677$ its WACC$
and its NP.
e. When e#al=ating m=t=ally eBcl=si#e projects$ those projects with
relati#ely long li#es will tend to ha#e relati#ely high NPs when the
cost of capital is relati#ely high.
NPV )rof(les Answer: +AR$
0*
. A company is choosing "etween two projects. The larger project has an
initial cost of -1&&$&&&$ ann=al cash flows of -+&$&&& for . years$ and
an 677 of 1..*/'. The smaller project has an initial cost of -.&$&&&$
ann=al cash flows of -10$&&& for . years$ and an 677 of 10.0+'. The
projects are eC=ally ris;y. Which of the following statements is
C@77ECT!

a. Since the smaller project has the higher 677$ the two projectsE NP
profiles cannot cross$ and the smaller project will loo; "etter
"ased on the NP at all positi#e #al=es of WACC.
". Since the smaller project has the higher 677$ the two projectsE NP
profiles will cross$ and the larger project will loo; "etter "ased
on the NP at all positi#e #al=es of WACC.
c. 6f the company =ses the NP method$ it will tend to fa#or smaller$
shorter,term projects o#er larger$ longer,term projects$ regardless
of how high or low the WACC is.
d. Since the smaller project has the higher 677 "=t the larger project
has the higher NP at a Aero disco=nt rate$ the two projectsE NP
profiles will cross$ and the larger project will ha#e the higher NP
if the WACC is less than the crosso#er rate.
e. Since the smaller project has the higher 677 and the larger NP at a
Aero disco=nt rate$ the two projectsE NP profiles will cross$ and
the larger smaller project will loo; "etter if the WACC is less than
the crosso#er rate.
#IRR Answer: c +AR$
0+
series of inflows.
a. A projectEs <677 is always greater than its reg=lar 677.
". A projectEs <677 is always less than its reg=lar 677.
c. 6f a projectEs 677 is greater than its WACC$ then the <677 will "e less
than the 677.
d. 6f a projectEs 677 is greater than its WACC$ then the <677 will "e
greater than the 677.
e. To find a projectEs <677$ we compo=nd cash inflows at the 677 and then
disco=nt the terminal #al=e at the WACC.
#IRR Answer: e +AR$
0/
"eing considered has normal cash flows$ with one cash o=tflow at t % &
followed "y a series of positi#e cash flows.
a. A projectEs <677 is always greater than its reg=lar 677.
". A projectEs <677 is always less than its reg=lar 677.
c. 6f a projectEs 677 is greater than its WACC$ then its <677 will "e
greater than the 677.
d. To find a projectEs <677$ we compo=nd cash inflows at the reg=lar 677
and then find the disco=nt rate that ca=ses the P of the terminal
#al=e to eC=al the initial cost.
e. To find a projectEs <677$ the teBt"oo; recommends compo=nding cash
inflows at the WACC and then finding the disco=nt rate that ca=ses the
P of the terminal #al=e to eC=al the initial cost.
NPV an )ro1ect select(on Answer: c +AR$
0.
. <oynihan <otors has a WACC of 1&'. The firm is considering two normal$
eC=ally ris;y$ "=t m=t=ally eBcl=si#e projects. Project A has an 677 of
1.'$ while Project 4 has an 677 of *&'. Which of the following statements
is C@77ECT!
a. 4oth projects ha#e a negati#e NP.
". Since the projects are m=t=ally eBcl=si#e$ the firm sho=ld always
select Project 4.
c. 6f the crosso#er rate is 1'$ Project 4 will ha#e a higher NP than
Project A.
d. @nly one project has a positi#e NP.
e. 6f the crosso#er rate is 1'$ Project A will ha#e a higher NP than
Project 4.
2hoos(n- a,on- ,&t&ally e3cl&s('e )ro1ects Answer: c +AR$
00
. Projects A and 4 are m=t=ally eBcl=si#e and ha#e normal cash flows.
Project A has an 677 of 1.' and Project 4 has an 677 of *&'. Also$ the
companyEs WACC is 1*'$ and at that rate Project A has the higher NP.
Which of the following statements is C@77ECT!
a. The crosso#er rate for the two projects m=st "e less than 1*'.
". Ass=ming the timing pattern of the two projectsE cash flows is the
same$ Project 4 pro"a"ly has a higher cost 8and larger scale9.
c. Ass=ming the two projects ha#e the same scale$ Project 4 pro"a"ly has a
faster pay"ac; than Project A.
d. The crosso#er rate for the two projects m=st "e 1*'.
e. Since 4 has the higher 677$ then it m=st also ha#e the higher NP if
the crosso#er rate is less than the WACC of 1*'.
#&lt()le IRRs Answer: c +AR$
03
. (o= are on the staff of Collier Company. The C:@ "elie#es project
acceptance sho=ld "e "ased on the NP$ "=t 4o" Collier$ the president$
insists that no project can "e accepted =nless its 677 eBceeds the
projectEs ris;,adj=sted WACC. Now yo= m=st ma;e a recommendation on a
project that has a cost of -1.$&&& and two cash flows. -11&$&&& at the end
of (ear 1 and ,-1&&$&&& at the end of (ear *. The president and the C:@
"oth agree that the appropriate WACC for this project is 1&'. At 1&'$ the
NP is -*$+...+3$ "=t yo= find two 677s$ one at 0.++' and one at .*3'$ and
a <677 of 11.+*'. Which of the following statements "est descri"es yo=r
optimal recommendation$ i.e.$ the analysis and recommendation that is "est
for the company and least li;ely to get yo= in tro="le with either the C:@
or the president!
a. (o= sho=ld recommend that the project "e rejected "eca=se its NP is
negati#e and its 677 is less than the WACC.
". (o= sho=ld recommend that the project "e rejected "eca=se$ altho=gh its
NP is positi#e$ it has an 677 that is less than the WACC.
c. (o= sho=ld recommend that the project "e accepted "eca=se 819 its NP
is positi#e and 8*9 altho=gh it has two 677s$ in this case it wo=ld "e
"etter to foc=s on the <677$ which eBceeds the WACC. (o= sho=ld eBplain
this to the president and tell him that that the firmEs #al=e will
increase if the project is accepted.
d. (o= sho=ld recommend that the project "e rejected "eca=se 819 altho=gh
its NP is positi#e and 8*9 it has two 677s$ one of which is less than
the WACC$ which indicates that the firmEs #al=e will decline if the
project is accepted.
e. (o= sho=ld recommend that the project "e rejected "eca=se$ altho=gh its
NP is positi#e$ its <677 is less than the WACC$ and that indicates
that the firmEs #al=e will decline if it is accepted.
PART II &uesti$ns and Pr$%lems fr$m Pri$r Test *an0 n$t used in Part I
Multi'le #($ice: Pr$%lems
#E$I%# (456 thro&-h 478)
Paybac! )er(o Answer: b
01
. The Seattle Corporation has an in#estment opport=nity that will yield cash
flows of -+&$&&& per year in (ears 1 thro=gh /$ -+.$&&& per year in (ears
. thro=gh 2$ and -/&$&&& in (ear 1&. This in#estment will cost -1.&$&&&
today$ and the firmEs WACC is 1&'. What is the pay"ac; period for this
in#estment!
a. ..*+ years
". /.10 years
c. /.&& years
d. 0.1* years
e. /.+. years
Paybac! )er(o Answer: c
02
. <ichigan <attress Company is considering the p=rchase of land and the
constr=ction of a new plant. The land$ which wo=ld "e "o=ght immediately
8at t % &9$ has a cost of -1&&$&&& and the "=ilding$ which wo=ld "e
erected at the end of the first year 8t % 19$ wo=ld cost -.&&$&&&. 6t is
estimated that the firmEs after,taB cash flow will "e increased "y
-1&&$&&& starting at the end of the second year$ and that this incremental
cash flow wo=ld increase "y 1&' ann=ally o#er the neBt 1& years. What is
the approBimate pay"ac; period!
a. * years
". / years
c. 0 years
d. 1 years
e. 1& years
$(sco&nte )aybac! Answer: e
3&
. Co=ghlin <otors is considering a project with the following eBpected cash
flows)
Project
(ear Cash :low
& ,-3&& million
1 *&& million
* +3& million
+ **. million
/ 3&& million
6f$ the projectEs WACC is 1&'$ what is the projectEs disco=nted pay"ac;!
a. +.1. years
". /.&2 years
c. 1.0* years
d. *..1 years
e. +.&2 years
$(sco&nte )aybac! Answer:
31
. A project has the following cash flows)
Project
(ear Cash :low
& ,-+$&&&
1 1$&&&
* 1$&&&
+ 1$&&&
/ 1$&&&
6f its WACC is 1&'$ what is the projectEs disco=nted pay"ac; period!
a. +.&& years
". +.+& years
c. +..* years
d. +.3. years
e. /.3. years
NPV Answer: a
3*
. As the capital "=dgeting director for 5en#er Corporation$ yo= are
e#al=ating two m=t=ally eBcl=si#e projects with the following net cash
flows)
Project J Project K
(ear Cash :low Cash :low
& ,-1&&$&&& ,-1&&$&&&
1 .&$&&& 1&$&&&
* /&$&&& +&$&&&
+ +&$&&& /&$&&&
/ 1&$&&& 0&$&&&
6f 5en#erEs WACC is 1.'$ which project wo=ld yo= choose!
a. Neither project.
". Project J$ since it has the higher 677.
c. Project K$ since it has the higher NP.
d. Project J$ since it has the higher NP.
e. Project K$ since it has the higher 677.
NPV Answer: a
3+
. Two m=t=ally eBcl=si#e projects ha#e the following projected cash flows)
Project A Project 4
& ,-.&$&&& ,-.&$&&&
1 1.$0*. &
* 1.$0*. &
+ 1.$0*. &
/ 1.$0*. &
. 1.$0*. 22$.&&
6f the reC=ired rate of ret=rn on these projects is 1&'$ which wo=ld "e
chosen and why!
a. Project 4 "eca=se it has the higher NP.
". Project 4 "eca=se it has the higher 677.
c. Project A "eca=se it has the higher NP.
d. Project A "eca=se it has the higher 677.
e. Neither$ "eca=se "oth ha#e 677s less than the cost of capital.
IRR Answer: c
3/
. The capital "=dgeting director of Sparrow Corporation is e#al=ating a
project that costs -*&&$&&&$ is eBpected to last for 1& years and prod=ces
after,taB cash flows$ incl=ding depreciation$ of -//$.&+ per year. 6f the
firmEs WACC is 1/' and its taB rate is /&'$ what is the projectEs 677!
a. 1'
". 1/'
c. 11'
d. ,.'
e. 1*'
IRR Answer: c
3.
. An ins=rance firm agrees to pay yo= -+$+1& at the end of *& years if yo=
pay premi=ms of -1&& per year at the end of each year for *& years. :ind
the internal rate of ret=rn to the nearest whole percentage point.
a. 2'
". 3'
c. .'
d. +'
e. 11'
IRR0 )aybac!0 an ,(ss(n- cash flow Answer:
30
. @a; :=rnishings is considering a project that has an =p,front cost and a
series of positi#e cash flows. The projectEs estimated cash flows are
s=mmariAed "elow)
Project
(ear Cash :low
& !
1 -.&& million
* +&& million
+ /&& million
/ 0&& million
The project has a reg=lar pay"ac; of *.*. years. What is the projectEs
internal rate of ret=rn 86779!
a. *+.1'
". 1/+.2'
c. 13.3'
d. ++..'
e. /1.&'
IRR an ,&t&ally e3cl&s('e )ro1ects Answer:
33
. A company is analyAing two m=t=ally eBcl=si#e projects$ S and >$ whose
cash flows are shown "elow)
(ears & 1 * +
L L L L
S ,1$1&& 1$&&& +.& .&
> ,1$1&& & +&& 1$.&&
The companyEs WACC is 1*'. What is the reg=lar 677 of the "etter project$
that is$ the project that maBimiAes the firmEs stoc; price!
a. 1*.&&'
". 1...+'
c. 11.0*'
d. 12.&1'
e. *&./0'
r % 1*'
NPV an IRR Answer: b
31
. The cash flows for two non,repeata"le$ m=t=ally eBcl=si#e projects are
shown "elow. 6f yo=r firmEs WACC is 1&'$ how m=ch #al=e is sacrificed if
yo=r firm selects the project with the higher 677!
Project S) & 1 * +
L L L L
,1$&&& .&& .&& .&&
Project >) & 1 * + / .
L L L L L L
,*$&&& 001.30 001.30 001.30 001.30 001.30
a. -*/+./+
". -*21.3&
c. -++*..&
d. -/11.1.
e. -.+..1+
NPV an IRR Answer: e
32
. A firm is analyAing two m=t=ally eBcl=si#e projects with the following
cash flows)
Project A Project 4
& ,-.&$&&& ,-+&$&&&
1 1&$&&& 0$&&&
* 1.$&&& 1*$&&&
+ /&$&&& 11$&&&
/ *&$&&& 1*$&&&
6f the companyEs WACC is 1&'$ what is the NP of the project with the
highest 677!
a. - 3$&2&
". - 1$+0&
c. -11$/.&
d. -1*$.1&
e. -1.$*&&
r % 1&'
r % 1&'
NPV0 IRR0 an )aybac! Answer:
1&
. 4ra=n 6nd=stries is considering an in#estment project that has the
following cash flows)
(ear Cash :low
& ,-1$&&&
1 /&&
* +&&
+ .&&
/ /&&
The companyEs WACC is 1&'. What is the projectEs pay"ac;$ 677$ and NP!
a. Pay"ac; % *./$ 677 % 1&.&&'$ NP % -0&&.
". Pay"ac; % *./$ 677 % *1.**'$ NP % -*0&.
c. Pay"ac; % *.0$ 677 % *1.**'$ NP % -+&&.
d. Pay"ac; % *.0$ 677 % *1.**'$ NP % -*0&.
e. Pay"ac; % *.0$ 677 % */.1*'$ NP % -+&&.
#E$I%#"+AR$ (479 thro&-h 467)
Paybac! )er(o Answer: c
11
. ?aig Aircraft is considering a project that has an =p,front cost paid
today at t % &. The project will generate positi#e cash flows of -0&$&&&
a year at the end of each of the neBt fi#e years. The projectEs NP is
-3.$&&& and the companyEs WACC is 1&'. What is the projectEs reg=lar
pay"ac;!
a. +.** years
". 1..0 years
c. *../ years
d. *.+. years
e. /.10 years
1*
. 5a#is Corporation has an in#estment policy that reC=ires accepta"le
projects to reco#er all costs within + years. The corporation =ses the
disco=nted pay"ac; method to assess potential projects and =ses a WACC of
1&'. The cash flows for two independent projects are shown "elow)
Project A Project 4
& ,-1&&$&&& ,-1&$&&&
1 /&$&&& .&$&&&
* /&$&&& *&$&&&
+ /&$&&& +&$&&&
/ +&$&&& &
6n which in#estment project8s9 sho=ld the company in#est!
a. Project A only.
". Neither Project A nor Project 4.
c. Project A and Project 4.
d. Project 4 only.
NPV Answer:
1+
. The Seattle Corporation has an in#estment opport=nity that will yield cash
flows of -+&$&&& per year in (ears 1 thro=gh /$ -+.$&&& per year in (ears
. thro=gh 2$ and -/&$&&& in (ear 1&. This in#estment will cost -1.&$&&&
today$ and the firmEs WACC is 1&'. What is the NP of this in#estment!
a. -1+.$21/
". - 11$&*+
c. -*12$&/.
d. - .1$1+1
e. - 2*$1/0
NPV Answer: b
1/
. (o= are considering the p=rchase of an in#estment that wo=ld pay yo=
-.$&&& per year for (ears 1,.$ -+$&&& per year for (ears 0,1$ and -*$&&&
per year for (ears 2 and 1&. 6f yo= reC=ire a 1/' rate of ret=rn$ and the
cash flows occ=r at the end of each year$ then how m=ch sho=ld yo= "e
willing to pay for this in#estment!
a. -1.$112.*3
". -*1$2+3.*0
c. -+*$/1..1.
d. -+1$&&&.&&
e. -.*$11..31
NPV Answer:
1.
. 4rown Irocery is considering a project that has an =p,front cost of -J.
The project will generate a positi#e cash flow of -3.$&&& at the end of
each of the neBt *& years. The project has a WACC of 1&' and an 677 of
1*'. What is the projectEs NP!
a. -1$*.&$&&&
". - 0+1$.13
c. - .0&$*&1
d. - 31$+&2
e. - *.&$&&&
NPV0 )aybac!0 an ,(ss(n- cash flow Answer: b
10
. Shannon 6nd=stries is considering a project that has the following cash
flows)
Project
(ear Cash :low
& !
1 -*$&&&
* +$&&&
+ +$&&&
/ 1$.&&
The project has a pay"ac; of *.. years$ and its WACC 1*'. What is the
projectEs NP!
a. - .33.01
". - 30..21
c. -1$&/2.1&
d. -*$301.+*
e. -+$30..21
IRR Answer:
13
. Ien=ine Prod=cts 6nc. reC=ires a new machine. Two companies ha#e
s="mitted "ids$ and yo= ha#e "een assigned the tas; of choosing one of the
machines. Cash flow analysis indicates the following)
<achine A <achine 4
& ,-*$&&& ,-*$&&&
1 & 1+*
* & 1+*
+ & 1+*
/ +$133 1+*
What is the 677 for each machine!
a. 677
A
% 10'M 677
4
% *&'
". 677
A
% */'M 677
4
% *&'
c. 677
A
% 11'M 677
4
% 10'
d. 677
A
% 11'M 677
4
% */'
e. 677
A
% */'M 677
4
% *0'
IRR Answer: c
11
. Whitney Crane 6nc. has the following independent in#estment opport=nities
for the coming year)
Ann=al >ife
Project Cost Cash 6nflows 8(ears9 677
A -1&$&&& -11$1&& 1
4 .$&&& +$&3. * 1.
C 1*$&&& .$020 +
5 +$&&& 1$&&2 / 1+
The 677s for Projects A and C$ respecti#ely$ are)
a. 10' and 1/'
". 11' and 1&'
c. 11' and *&'
d. 11' and 1+'
e. 10' and 1+'
IRR Answer: e
12
. A project has the following net cash flows)
Project
(ear Cash :low
& ,- J
1 1.&
* *&&
+ *.&
/ /&&
. 1&&
At the projectEs WACC of 1&'$ the project has an NP of -1*/.31. What is
the projectEs 677!
a. 1&.&&'
". 1*.0*'
c. 1+./2'
d. 1..0*'
e. 10.+1'
NPV an IRR Answer: a
2&
. A company is analyAing two m=t=ally eBcl=si#e projects$ S and >$ whose
cash flows are shown "elow)
(ears & 1 * + /
S ,1$1&& 2&& +.& .& 1&
> ,1$1&& & +&& .&& 1.&
The companyEs WACC is 1*'$ and it can get an =nlimited amo=nt of capital
at that cost. What is the reg=lar 677 8not <6779 of the "etter project!
a. 1+.&2'
". 1*.&&'
c. 13./0'
d. 1+.11'
e. 1*..+'
IRR0 )aybac!0 an ,(ss(n- cash flow Answer: c
21
. ?adl.com is considering the following two projects)
Project 1 Project *
& ,-1&& !
1 +& /&
* .& 1&
+ /& 0&
/ .& 0&
The two projects ha#e the same pay"ac;. What is Project *Es internal rate
of ret=rn 86779!
a. //.*3'
". *+./&'
c. *&.1.'
d. 1/.3+'
e. 13.0/'
#IRR Answer:
2*
. Alyes;a Salmon 6nc is considering a new a=tomated prod=ction line project.
The project has a cost of -*3.$&&& and is eBpected to pro#ide after,taB
ann=al cash flows of -3+$+&0 for eight years. The firmEs management
prefers =sing the modified 677 approach. The firmEs WACC is 1*'. What is
the projectEs <677!
a. 1..&'
". 1/.&'
c. 1*.&'
d. 10.&'
e. 13.&'
#IRR Answer: e
2+
. <artin <an=fact=rers is considering a fi#e,year in#estment that costs
-1&&$&&&. The in#estment will prod=ce cash flows of -*.$&&& each year for
the first two years$ -.&$&&& a year for each of the remaining three years.
The company has a WACC of 1*'. What is the <677 of the in#estment!
a. 1*.1&'
". 1/.++'
c. 10.&&'
d. 11.*.'
e. 12./.'
#IRR Answer:
2/
. A company is considering a project with the following cash flows)
Project
(ear Cash :low
& ,-1&&$&&&
1 .&$&&&
* .&$&&&
+ .&$&&&
/ ,1&$&&&
The projectEs WACC is estimated to "e 1&'. What is the <677!
a. 11.*.'
". 11..0'
c. 1+.*1'
d. 1/.*.'
e. *&.+/'
#IRR Answer: e
2.
. Capitol City Transfer Company is considering "=ilding a new terminal that
will reC=ire eBpendit=res of -1 million immediately 8at t % &9 and another
-1 million at the end of (ear 1 8t % 19. 6t will then recei#e net cash
flows of -&.. million at the end of (ears *,.$ and it eBpects to sell the
property and net -1 million at the end of (ear 0. All cash inflows and
o=tflows are after taBes. The companyEs WACC is 1*'$ and it =ses the <677
criterion for capital "=dgeting decisions. What is the projectEs <677!
a. 11.2'
". 1*.&'
c. 11./'
d. 11..'
e. 11.3'
#IRR Answer: e
20
. Arrington <otors is considering a project with the following cash flows)
Time period Cash :lows
& ,-*&&
1 N1*&
* ,.&
+ N3&&
The project has a WACC of 1*'. What is the projectEs <677!
a. 01./3'
". .1./2'
c. /1..1'
d. +3.**'
e. .*./2'
#IRR Answer: e
23
. 5it;a 5iners is considering a project with the following eBpected cash
flows 8in millions of dollars9)
Project
(ear Cash :low
& ,-+&&
1 ,1&&
* 3&
+ 1*.
/ 3&&
The projectEs WACC is 1&'. What is the projectEs <677!
a. +0.2.'
". 11.1+'
c. *3.+.'
d. *0./1'
e. *+.2+'
+AR$ (466 thro&-h 488:)
#IRR an ,(ss(n- cash flow Answer:
21
. 4elanger Constr=ction is considering a project with the following
s="seC=ent cash flows)
Project
(ear Cash :low
& !
1 -/&&
* .&&
+ *&&
The projectEs pay"ac; is 1.. years$ and it has a WACC of 1&'. What is the
projectEs <677!
a. 1&.&&'
". 12.0.'
c. *1../'
d. *+.1*'
e. 1/.3.'
#IRR0 )aybac!0 an ,(ss(n- cash flow Answer:
22
. Tyrell Corporation is considering a project with the following cash flows
8in millions of dollars9)
Project
(ear Cash :low
& !
1 -1.&
* 1..
+ *.&
/ *..
The project has a pay"ac; of eBactly *.& years. The projectEs WACC is
1*'. What is the projectEs <677!
a. 1*..&'
". *1../'
c. 1...3'
d. ++.10'
e. +1.1*'
#&t&ally e3cl&s('e )ro1ects Answer: b
1&&
. Two m=t=ally eBcl=si#e projects ha#e the following projected cash flows)
Project A Project 4
& ,-1&&$&&& ,-1&&$&&&
1 +2$.&& &
* +2$.&& &
+ +2$.&& 1++$&&&
4ased only on the information gi#en$ which of the two projects wo=ld "e
preferred$ and why!
a. Project A$ "eca=se it has a higher NP.
". Project 4$ "eca=se it has a higher 677.
c. 6ndifferent$ "eca=se the projects ha#e eC=al 677s.
d. 6ncl=de "oth in the capital "=dget$ since the s=m of the cash inflows
eBceeds the initial in#estment in "oth cases.
e. Choose neither$ since their NPs are negati#e.
/efore;ta3 cash flows Answer: b
1&1
. Scott CorporationEs new project calls for an in#estment of -1&$&&&. 6t
has an estimated life of 1& years and an 677 of 1.'. 6f cash flows are
e#enly distri"=ted and the taB rate is /&'$ what is the ann=al "efore,taB
cash flow each year! 8Ass=me depreciation is a negligi"le amo=nt.9
a. -1$22+
". -+$+*1
c. -1$.&&
d. -/$21+
e. -.$&12
NPV Answer: c
1&*
. 7et=rns on the mar;et and Ta;eda CompanyEs stoc; d=ring the last + years
are shown "elow)
(ear <ar;et Ta;eda
1 ,1*' ,1/'
* *+ +1
+ 10 1&
The ris;,free rate is 3'$ and the mar;et ris; premi=m is .'. Ta;eda is
considering a project whose mar;et "eta was fo=nd "y adding &.* to the
companyEs o#erall corporate "eta. Ta;eda is 1&&' eC=ity financed$ all of
which comes from retained earnings. The project has a cost of -1&&
million$ and it is eBpected to pro#ide cash flows of -*& million per year
at the end of (ears 1 thro=gh . and then -+& million per year at the end
of (ears 0 thro=gh 1&. What is the projectEs NP 8in millions of
dollars9!
a. -*&.12
". -**...
c. -*+.11
d. -*..30
e. -*1.1*
NPV Answer: c
1&+
. 7et=rns on the mar;et and Company (Es stoc; d=ring the last + years are
shown "elow)
(ear <ar;et Company (
1 ,*/' ,**'
* 1& 1+
+ ** +0
The ris;,free rate is . percent$ and the reC=ired ret=rn on the mar;et is
11 percent. (o= are considering a low,ris; project whose mar;et "eta is
&.. less than the companyEs o#erall corporate "eta. (o= finance only with
eC=ity$ all of which comes from retained earnings. The project has a cost
of -.&& million$ and it is eBpected to pro#ide cash flows of -1&& million
per year at the end of (ears 1 thro=gh . and then -.& million per year at
the end of (ears 0 thro=gh 1&. What is the projectEs NP 8in millions of
dollars9!
a. - 3.1&
". - 2.*0
c. -1&./*
d. -1*.1&
e. -1..3.
#IRR an NPV Answer: c
1&/
. Two m=t=ally eBcl=si#e projects$ J and ($ ha#e the following cash flows)
Project J Project (
& ,-*$&&& ,-*$&&&
1 *&& *$&&&
* 0&& *&&
+ 1&& 1&&
/ 1$/&& 3.
The projects are eC=ally ris;y$ and yo=r firmEs WACC is 1*'. (o= m=st
ma;e a recommendation$ and it m=st "e "ased on the modified 677 8<6779.
What is the <677 of the "etter project!
a. 1*.&&'
". 11./0'
c. 1+..2'
d. 1*.12'
e. 1..3+'
#IRR an ,(ss(n- cash flow Answer: b
1&.
. Project C has the following net cash flows)
Project C
(ear Cash :low
& ,-.&&
1 *&&
* ,J
+ +&&
/ .&&
Note that the cash flow$ J$ at t % * is an o=tflow 8that is$ J O &9.
Project C has a WACC of 1&' and an <677 of 1*'. What is the projectEs cash
o=tflow at t % *!
a. ,-120.0.
". ,-*+3.2.
c. ,-*/0.01
d. ,-*0*.2*
e. ,-+11.1+
#IRR an ,(ss(n- cash flow Answer: b
1&0
. 5iefen"a;er 6nc. is considering a project with the following cash flows)
Project
(ear Cash :low
& !
1 -1&&$&&&
* *&&$&&&
+ *&&$&&&
/ ,1&&$&&&
The project has a pay"ac; of *.& years and a WACC of 1&'. What is the
projectEs <677!
a. ..3/'
". 1*.3/'
c. 1+.+/'
d. 10.+3'
e. 13.03'
#IRR Answer: e
1&3
. Taylor Technologies has a target capital str=ct=re that consists of /&'
de"t and 0&' eC=ity. The eC=ity will "e financed with retained earnings.
The companyEs "onds ha#e a yield to mat=rity of 1&'. The companyEs stoc;
has a "eta % 1.1. The ris;,free rate is 0'$ the mar;et ris; premi=m is .'$
and the taB rate is +&'. The company is considering a project with the
following cash flows)
Project A
(ear Cash :low
& ,-.&$&&&
1 +.$&&&
* /+$&&&
+ 0&$&&&
/ ,/&$&&&
What is the projectEs <677!
a. 0.30'
". 2.*0'
c. 1&.31'
d. 10.1/'
e. *&..*'
#IRR Answer: b
1&1
. ?o=ston 6nc. is considering "=ilding a new refrigerated wareho=se that
will cost -3$&&&$&&& at t % & and is eBpected to ha#e operating cash flows
of -.&&$&&& at the end of each of the neBt *& years. ?owe#er$ repairs
that will cost -1$&&&$&&& m=st "e inc=rred at the end of the 1&th year.
Th=s$ at the end of (ear 1& there will "e a -.&&$&&& operating cash inflow
and an o=tflow of ,-1$&&&$&&& for repairs. 6f ?o=stonEs WACC is 1*'$ what
is the projectEs <677!
a. 3.3.'
". 1.13'
c. 2.11'
d. 11./.'
e. 1*.++'
PV of cash flows Answer: c
1&2
. A specialty shop in a local mall c=rrently has a lease that calls for
payments of -1$&&& at the end of each of the neBt 0& months. The landlord
has offered a new .,year lease that calls for Aero rent for 0 months$ then
rental payments of -1$&.& at the end of each month for the neBt ./ months.
SallyEs cost of capital is 11'. 4y what a"sol=te dollar amo=nt wo=ld
accepting the new lease change SallyEs theoretical net worth!
a. -*$11&.&2
". -+$*/+.*/
c. -+$1&+.&0
d. -/$*22.13
e. -/$011.30
Multiple part:
(The following information applies to the next five problems.)
Woodgate 6nc. is considering a project with the following after,taB operating
cash flows 8in millions of dollars9)
Project
(ear Cash :low
& ,-+&&
1 1*.
* 3.
+ *&&
/ 1&&
The project has a WACC of 1&'.
Paybac! )er(o Answer: b
11&
. What is the projectEs pay"ac; period!
a. *.&& years
". *..& years
c. *.0. years
d. *.1+ years
e. +.&& years
111
. What is the projectEs disco=nted pay"ac; period!
a. *.&& years
". *..& years
c. *.0. years
d. *.1+ years
e. +.&& years
IRR Answer:
11*
. What is the projectEs 677!
a. 1&.&&'
". 10.1+'
c. 12.1*'
d. *+./*'
e. *0.+*'
NPV Answer: c
11+
. What is the projectEs NP!
a. - *..11 million
". - /&.21 million
c. - 2/.11 million
d. -1+3..0 million
e. -121.3+ million
#IRR Answer: c
11/
. What is the projectEs <677!
a. 3.0/'
". 1&..+'
c. 13.33'
d. 12.1*'
e. *3.0/'
(The following information applies to the following three problems.)
Project A has a WACC of 1&' and the following cash flows)
Project A
(ear Cash :low
& ,-+&&
1 1&&
* 1.&
+ *&&
/ .&
NPV Answer:
11.
. What is Project AEs NP!
a. - *1.+*
". - 00.*0
c. - 1+.&&
d. - 22.*2
e. -11*.+1
IRR Answer:
110
. What is Project AEs 677!
a. 1+.//'
". 10.10'
c. 11.2*'
d. */.32'
e. *0../'
#IRR Answer: e
113
. What is Project AEs <677!
a. 3./&'
". 1*.1.'
c. 1/./2'
d. 1.../'
e. 11.1.'
(The following information applies to the next two problems.)
Company A is considering a project with the following cash flows)
Project
(ear Cash :low
& ,-.$&&&
1 .$&&&
* +$&&&
+ ,1$&&&
The project has a WACC of 1&'.
NPV Answer: b
111
. What is the projectEs NP!
a. -1$1.3
". -1$*3+
c. -1$111
d. -*$&&&
e. -*$330
#IRR Answer: c
119
. What is the projectEs <677!
a. 10.0'
". 13.&'
c. 13.0'
d. 11.&'
e. 11.0'
(The following information applies to the next two problems.)
Company 4 is considering a project with the following cash flows)
Project
(ear Cash :low
& , J
1 13.
* 13.
+ +&&
#(ss(n- cash flow0 )aybac! )er(o0 an NPV Answer: a
1*&
. Ass=me that the project has a reg=lar pay"ac; period of * years and a WACC
of 1&'. What is the projectEs NP!
a. -132.11
". -*&/.11
c. -**2.11
d. -*./.11
e. -*32.11
#(ss(n- cash flow0 IRR0 an NPV Answer: c
1*1
. Now instead of ma;ing an ass=mption a"o=t the pay"ac; period$ ass=me that
the project has an 677 of 1.'. Ii#en this ass=mption$ what wo=ld "e the
projectEs NP$ if the WACC eC=als 1*'!
a. - &.&&
". -11.&1
c. -*3../
d. -+3.+&
e. -/3.+0
(The following information applies to the next three problems.)
4ell Corporation is considering two m=t=ally eBcl=si#e projects$ Project A and
Project 4. The projects ha#e the following cash flows)
Project A Project 4
& ,.&& ,.&&
1 1.& +&&
* *&& +&&
+ *.& +.&
/ 1&& ,+&&
4oth projects ha#e WACCs of 1&'.
NPV Answer:
1**
. What is Project AEs NP!
a. +&.1*
". +/.10
c. /0.1+
d. .3.31
e. 0*.&1
IRR Answer: a
1*+
. What is Project AEs 677!
a. 1..+*'
". 1..1*'
c. 10.&/'
d. 10.01'
e. 13.&1'
#IRR Answer: b
1*/
. What is Project 4Es <677!
a. 1*.&.'
". 1*.2.'
c. 1+.+3'
d. 1/.&1'
e. 1/.11'
#HAPTER ))
A!+1ER+ A!D +,L.TI,!+
1. NPV (constant cash flows; 3 years) Answer: a EASY
WACC: 10.00%
0 1 2 3
Cash flows -$1,000 $500 $500 $500
Ans"er: 1A##: )2324
NPV = 5678378 9ear 2: :5),222
*. NPV (constant cash flows; 4 years) Answer: c EASY
WACC: 10.00%
0 1 2 3 4
Cash flows -$1,000 $475 $475 $475 $475
Ans"er: 1A##: )2324
NPV = 5;2;3<= 9ear 2: :5),222
+. NPV (constant cash flows; 5 years) Answer: e EASY
WACC: 10.00%
0 1 2 3 4 5
Cash flows -$1,000 $300 $300 $300 $300 $300
Ans"er: 1A##: )2324
NPV = 5)8>367 9ear 2: :5),222
/. IRR (constant cash flows; 3 years) Answer: b EASY
0 1 2 3
Cash flows -$1,000 $450 $450 $450
Ans"er:
IRR = )<3<;4 9ear 2: :5),222
.. IRR (constant cash flows; 4 years) Answer: EASY
0 1 2 3 4
Cash flows -$1,000 $400 $400 $400 $400
Ans"er:
IRR = 6)3?<4 9ear 2: :5),222
0
. IRR (constant cash flows; 5 years) Answer: a EASY
0 1 2 3 4 5
Cash flows -$1,000 $350 $350 $350 $350 $350
Ans"er:
IRR = 663))4 9ear 2: :5),222
3. Paybac! (constant cash flows; 3 years) Answer: c EASY
0 1 2 3
Cash flows -$1,000 $500 $500 $500
Ans"er:
Cuula!"#$ C% -$1,000 -$500 $0 $500
Pa&'a() = 6322 : : 6322 :
1. Paybac! (nonconstant cash flows; 5 years) Answer: e EASY"#E$I%#
0 1 2 3 4 5
Cash flows -$1,000 $300 $310 $320 $330 $340
Ans"er:
Cuula!"#$ C% -$1,000 -$700 -$3*0 -$70 $2+0 $+00
Pa&'a() = 836) : : : : 836) :
2. NPV (&ne'en cash flows; 3 years) Answer: a EASY"#E$I%#
WACC: )23224
0 1 2 3
Cash flows :5),222 57;2 57<2 57>2
Ans"er:
NPV = 5)7638> 1A##: )2324
1&. NPV (&ne'en cash flows; 3 years) Answer: c EASY"#E$I%#
WACC: )23224
0 1 2 3
Cash flows :5),222 57;2 5772 5782
Ans"er:
NPV = 5=;3>= 1A##: )2324
11
. NPV (&ne'en cash flows; 4 years) Answer: e EASY"#E$I%#
WACC: )23224
0 1 2 3 4
Cash flows :5),222 5722 572; 57)2 57);
Ans"er:
NPV 56?=3?7 1A##: )2324
1*. NPV (&ne'en cash flows; 5 years) Answer: b EASY"#E$I%#
1A##: )23224
0 1 2 3 4 5
Cash flows :5),222 5722 58=; 58=2 58?; 58?2
Ans"er:
NPV = 57?632) 1A##: )2324
1+. IRR (&ne'en cash flows; 3 years) Answer: EASY"#E$I%#
0 1 2 3
Cash flows :5),222 57;2 57>2 57=2
Ans"er:
IRR = )=32;4 9ear 2: :5),222
1/. IRR (&ne'en cash flows; 4 years) Answer: a EASY"#E$I%#
0 1 2 3 4
Cash flows :5),222 56;2 5682 56)2 5)=2
Ans"er:
IRR = :;3);4 9ear 2: :5),222
1.. IRR (&ne'en cash flows; 5 years) Answer: c EASY"#E$I%#
0 1 2 3 4 5
Cash flows :5),222 5822 56=; 56=2 56?; 56?2
Ans"er:
IRR = )73224 9ear 2: :5),222
10
. $(sco&nte )aybac! (constant cash flows; 3 years) Answer: b #E$I%#
WACC: 10.00%
0 1 2 3
Cash flows -$1,000 $500 $500 $500
Ans"er:
PV of C%s -$1,000 $455 $413 $37+
Cuula!"#$ C% -$1,000 -$545 -$132 $244
Pa&'a() = 638; : : : 638;
13. $(sco&nte )aybac! (nonconstant cash flows; 4 years) Answer: #E$I%#
WACC: 10.00%
0 1 2 3 4
Cash flows -$1,000 $525 $4,5 $445 $405
Ans"er:
PV of C%s -$1,000 $477 $401 $334 $277
Cuula!"#$ C% -$1,000 -$523 -$122 $212 $4,*
Pa&'a() = 638< : : : 638< :
11. #IRR (&ne'en cash flows; 3 years) Answer: e #E$I%#
1A##: )23224
0 1 2 3
Cash flows :5),222 58;2 58>2 58=2
Ans"er: T@:
#$m'$unded values: 57683;2 572>322 58=2322 5),6623;2
-IRR = <3?>4 fou./ as /"s(ou.! 0a!$ !ha! $1ua!$s PV of 2V !o (os!
-IRR = <3?>4 Al!$0.a!"#$ (al(ula!"o., w"!h 34($l
12. #IRR (&ne'en cash flows; 4 years) Answer: b #E$I%#
1A##: )23224
0 1 2 3 4
Cash flows :5=22 5822 5862 5872 58<2
Ans"er: T@:
#$m'$unded values: 58==382 58?>362 58>7322 58<2322 5),;623;2
-IRR = )732)4 fou./ as /"s(ou.! 0a!$ !ha! $1ua!$s PV of 2V !o (os!
-IRR = )732)4 fou./ w"!h 34($l
*&
. NPV 's IRR (constant cash flows; 3 years) Answer: #E$I%#
5l/ WACC: 10.00% N$w WACC: 5.00%
0 1 2 3
Cash flows -$1,000 $500 $500 $500
Ans"er:
5l/ NPV = 5678378
N$w NPV = 58<)3<6
Cha.6$ 5))?3)=
*1. NPV 's IRR (nonconstant cash flows; 3 years) Answer: a #E$I%#
5l/ WACC: 10.00% N$w WACC: ,.00%
0 1 2 3
Cash flows -$1,000 $500 $520 $540
Ans"er:
5l/ NPV = 56=232) ,ld 1A##: )23224
N$w NPV = 588>37; 1A## adder: :63224
Cha.6$ 57>377 !e" 1A##: ?3224
**. NPV 's IRR (s(*e (fferences) Answer: c #E$I%#"+AR$
1A##: )63224
0 1 2 3 4
C%
7
:5),26; 58>; 58?2 58?; 58=2
C%
8
:56,);8 5>;2 5>;= 5><? 5>>>
Ans"er:
IRR, L );3;4
IRR, + )?3)4
!P@, L 5)<63)<
!P@, + 5)873<7
Valu$ los! 56>3;6
7 L
)873< )<636
0% ;2;32 =2)32
2% 78)32 >;837
4% 8<63; <)<3?
+% 6==3) 7=238
,% 67238 8>63=
10% )?;3< 6<83?
12% )873< )<636
14% ?>3) <>38
1+% 763> :6)36
1,% )36 :)273)
20% :8>3> :)?)3?
22% :>736 :6;73<
24% :)2?3< :8683)
-200
0
200
400
600
800
1,000
0% 5% 10% 15% 20%
S
L
*+. NPV 's IRR ((fferent t(,(n- )atterns) Answer: e #E$I%#"+AR$
1A##: )23224
0 1 2 3 4
C%
7
:5),26; 5<;2 57;2 56;2 5;2
C%
8
:5),26; 5)22 5822 5;22 5>22
Ans"er:
IRR, L );3>4
IRR, + )=3=4
!P@, L 5)<>3<)
!P@, + 5);=3>=
Valu$ los! 5>3?6
7 L
);=3? )<>3<
0% 8>;32 ;>;32
2% 86<3< 7>=36
4% 6?)32 8=)37
+% 68?36 8)23<
,% )=>3= 68<36
10% );=3? )<>3<
12% )683? )2736
14% ?=3? 7;3;
1+% ;>3; :?3=
1,% 6>32 :;=37
20% :632 :)2<37
22% :6=3< :);23)
24% :;;3= :)=23=
-100
0
100
200
300
400
500
600
0% 5% 10% 15% 20% 25%
S
L
*/
. NPV 's IRR ((fferent t(,(n- )atterns) Answer: a #E$I%#"+AR$
1A##: )23;24
0 1 2 3 4
C%
7
:5),2;2 5<;2 5<;2
C%
8
:5),2;2 5722 5722 5722 5722
Ans"er:
IRR, L )=384
IRR, + );3;4
!P@, L 5627387
!P@, + 5>23;>
Valu$ los! 52322
+ L
>23< 62738
0% 6;232 ;;232
2% 6)632 7>83)
4% )><32 72632
+% )7)3> 88<32
,% )2=3) 6>73=
10% >?3) 6)>3=
12% 7?3; )<73=
14% 6238 ));3;
1+% :<3< <=38
1,% :8638 6<32
20% :;<3= :)73;
22% :?23; :;63;
24% :)283) :??38
2+% :)673> :)6)3=
2,% :)7;3; :);83<
-200.0
-100.0
0.0
100.0
200.0
300.0
400.0
500.0
600.0
700.0
0% 6% 12% 18% 24%
!
"
*.
. NPV 's #IRR (s(*e (fferences) Answer: #E$I%#"+AR$
1A##: )23224
0 1 2 3 4
C%
7
:5),222 58>; 58>; 58>; 58>;
C%
8
:56,2)2 5>6; 5>6; 5>6; 5>6;
Ans"er:
MIRR, L )83>4
MIRR, + )73=4 1A##: )2324 1A##: )2324
!P@, L 56??3); 9ear 2: :5),222 9ear 2: :56,2)2
!P@, + 5)??3>2 9ear ): 58>; 9ear ): 5>6;
Valu$ los! 5==37;
7 L
)??3> 6??36
0% ;2232 ?=232
2% 76>3= >;23<
4% 8<)36 <6)3>
+% 6==37 ;2636
,% 67632 8=)38
10% )??3> 6??36
12% )8=32 )=63)
14% =63< )2637
1+% 7=38 )?3>
1,% ?3? :;=3>
20% :6=36 :)8836
22% :<73= :6263)
24% :=?37 :6<<3=
Pr$Aect + Pr$Aect L
-200
0
200
400
600
800
1,000
0% 5% 10% 15% 20%
S
L
*0
. NPV 's )aybac! Answer: #E$I%#"+AR$
1A##: )83224
0 1 2 3 4
C%
7
:5),222 5722 5722 5722 5722
C%
8
:56,)22 5?22 5?22 5?22 5?22
Ans"er:
Cuula!"#$ C%, 7 -$1,000 -$+00 -$200 $200 $+00
Cuula!"#$ C%, 8 -$2,100 -$1,300 -$500 $300 $1,100
Pay%ac0 + 63;2 : : : 63;2 :
Pay%ac0 L 63<8 : : : 63<8 :
!P@, L 56>=3;?
!P@, + 5)?=3>=
Valu$ los! 5?=3>= 1A##: )8324 1A##: )8324
9ear 2: :5),222 9ear 2: :56,)22
9ear ): 5722 9ear ): 5?22
7 L
)?=3? 6>=3<
0% <2232 ),)2232
2% ;683) =7<36
4% 7;632 ?283=
+% 8?<32 <>63)
,% 8673= ;7=3>
10% 6<>3= 78;3=
12% 6)73= 86=3=
14% )<;3; 68)32
1+% ))=38 )8?3;
1,% ><32 ;632
20% 8;3; :6=32
22% :63; :)2;3)
24% :8?38 :)><3<
Pr$Aect + Pr$Aect L
-200
0
200
400
600
800
1,000
1,200
0% 5% 10% 15% 20% 25%
S
L
*3
. NPV 's IRR Answer: a +AR$
1A##: )23224
0 1 2 3 4
C%
7
:5),26; 5<;2 5<;2
C%
8
:5),26; 5722 5722 5722 5722
Ans"er:
IRR, L 623;4
IRR, + )>374
!P@, L 56763=;
!P@, + 5)283)2
Valu$ los! 52322 + L
)283) 6763=
0% 6>;32 ;>;32
2% 68>32 7=?3)
4% 62)32 76>32
+% )<<3> 8<)32
,% )873) 6==3=
10% )283) 6763=
12% >83; )?=3=
14% 7;38 )723;
1+% )?37 =738
1,% :>38 ;)32
20% :8)3= )23;
22% :;;3; :6>3;
24% :>?3) :<838
2+% :==3> :=<3=
2,% :)623; :)6?3<
30% :)7237 :);?3;
-200
-100
0
100
200
300
400
500
600
700
0% 6% 12% 18% 24% 30%
*1. NPV an )aybac! Answer: e +AR$
9$a0 0 1 2 3 4 5
C%s Cos! = : $+0,000 $+0,000 $+0,000 $+0,000 $+0,000
P0o;$(!<s NPV 5>;,222
WACC )2324
PV of (ash ".flows $227,447 = PV of C%s show. o. !"$ l".$
8$ss NPV -$75,000
I."!"al (os! of =0o;$(! $152,447
9$a0 0 1 2 3 4 5
C% -$152,447 $+0,000 $+0,000 $+0,000 $+0,000 $+0,000
Cu. C% -$152,447 -$*2,447 -$32,447 $27,553 $,7,553 $147,553
Pay%ac0 63;7 : : 63;7 : :
*2
. Ran!(n- ,ethos Answer: b EASY
Statement " is tr=e$ "eca=se a projectEs NP increases as the WACC declines.
+&. Ran!(n- ,ethos Answer: EASY
Statement d is tr=e. Academics prefer NP "eca=se it indicates the amo=nt "y
which a project increases the firmEs #al=e.
+1. Ran!(n- ,ethos: )aybac! Answer: EASY
Statement d is tr=e. The pay"ac; does indicate how long it sho=ld ta;e to
reco#er the in#estment$ hence it is a meas=re of liC=idity.
+*. Ran!(n- ,ethos: IRR Answer: e EASY
The 677 ass=mes rein#estment at the 677$ and that is generally not as #alid as
ass=ming rein#estment at the WACC$ as with the NP.
++. Nor,al 's. nonnor,al cash flows Answer: e EASY
+/. Nor,al 's. nonnor,al cash flows Answer: a EASY
+. . NPV
Answer: c EASY
+0 . Paybac!
Answer: b EASY
+3 . Paybac!
Answer: b EASY
+1 . IRR
Answer: EASY
+2 . IRR
Answer: EASY
/&. Ran!(n- ,ethos: NPV Answer: e #E$I%#
Statement e is correct. The others are all false. 6f yo= draw an NP profile
for one project$ yo= will see that if the WACC is less than the 677$ the NP
m=st "e positi#e.
/1. Ran!(n- ,ethos: NPV Answer: b #E$I%#
Statement " is correct$ and the others are all false. Cash flows from a
project can "e =sed to replace f=nds that wo=ld "e raised in the mar;et at the
WACC$ so the WACC is the opport=nity cost for rein#ested cash flows. Since the
NP ass=mes rein#estment at the WACC while the 677 ass=mes rein#estment at the
677$ NP is generally the "etter method.
/*. NPV )rof(les Answer: EASY"#E$I%#
/+. Ran!(n- confl(cts Answer: a #E$I%#
//. Paybac! )er(o Answer: #E$I%#
/. . NPV
Answer: b #E$I%#
/0. NPV an IRR Answer: e #E$I%#
/3 . NPV )rof(les
Answer: a #E$I%#
Statement a is tr=e and the other statements are all false. 5istant cash
flows are more se#erely penaliAed "y high disco=nt rates$ so if the NP
profile line has a steep slope$ this indicates that its cash flows occ=r
relati#ely late.
/1. NPV )rof(les Answer: b #E$I%#
Statement " is tr=e$ while the other statements are all false. Project >
m=st ha#e the longer life$ and since distant cash flows are impacted more "y
changes in the disco=nt rate$ its NP profile m=st "e steeper.
/2. NPV0 IRR0 an #IRR Answer: a #E$I%#
.&. NPV0 IRR0 an #IRR Answer: c #E$I%#
.1. #(scellaneo&s conce)ts Answer: a #E$I%#
.*. #(scellaneo&s conce)ts Answer: a #E$I%#
.+. NPV0 IRR0 an #IRR Answer: c #E$I%#
./. NPV0 IRR0 an #IRR Answer: e #E$I%#
... #&lt()le IRRs Answer: #E$I%#
.0
. NPV )rof(les Answer: a #E$I%#"+AR$

0 7% 15% 12%
L
#P$
%&'
r %('
S
Statement a is tr=e$ "eca=se "oth projects ha#e an 677 greater than the WACC and
th=s will ha#e a positi#e NP. Statement " is false$ "eca=se at 0'$ the WACC is
less than the crosso#er rate and Project > has a higher NP than S. Statement c
is false$ "eca=se at 1+' the WACC is greater than the crosso#er rate and > wo=ld
ha#e a higher NP than S. Statement d is false$ "eca=se of reasons mentioned for
statement a. Statement e is false$ "eca=se Project SEs NP profile is flatter$
which means Project >Es NP is more sensiti#e to changes in WACC.
.3. NPV )rof(les Answer: e #E$I%#"+AR$

0 8% 14% 11%
#P$
%&'
r %('
A
B
Statement e is tr=e$ while the other statements are all false.
.1
. NPV )rof(les Answer: b #E$I%#"+AR$
0 16% 30% 18%
A
#P$
%&'
)iscount
rate %('
B
17%
Statement a is false$ "eca=se if the profiles do not cross$ then one will
dominate the other$ with a higher 677 and a higher NP at e#ery disco=nt rate.
Statement " is tr=e. Statement c is false. Statement d is false "eca=se a
conflict can res=lt from difference in the timing of the cash flows. Statement
e is false "eca=se scale differences can res=lt in profile crosso#ers and th=s
conflicts.
.2. NPV )rof(les Answer: b #E$I%#"+AR$

0 10% 19% 17%
Y
#P$
%&'
)iscount
rate %('
X
As we can see from the graph$ statement " is tr=e$ "=t the other statements are
all false.
0&
. NPV )rof(les Answer: e +AR$
7efer to the NP profile "elow. Statement a is false$ "eca=se yo= do not ;now
which project has the higher NP =nless yo= ;now the WACC. Statement " is false$
"eca=se if the WACC is greater than 677
>
"=t less than 677
S
then Project S will
ha#e a positi#e NP and Project >Es NP will "e negati#e. Statements c and d are
false$ "eca=se 677 is independent of WACC. Statement e is tr=e$ "eca=se Project
S has the higher 677$ so Project >Es NP profile is a"o#e Project SEs when the
WACC is "elow the crosso#er.

0 10% IRR-S IRR-L
#P$
%&'
r %('
S
L
01. NPV )rof(les Answer: c +AR$
0 16% 30% 18%
A
#P$
%&'
)iscount
rate %('
B
17%
7ecall that the #ery definition of the 677 is the disco=nt rate at which the
NP is Aero. Therefore$ statement c is tr=e$ while all the other statements
are false.
0*
. NPV )rof(les Answer: +AR$
-10000
10000
30000
50000
0% 5% 10% 15% 20%
L
S
Statement d tr=e$ "=t all the other statements are false.
0+ . #IRR
Answer: c +AR$
7ecall that if the 677 is eC=al to the WACC$ then the <677 and the 677 will "e
eC=al$ "=t if the 677 is greater than the WACC$ the <677 will "e less than the
677$ and #ice #ersa if the 677 is less than the WACC. This sit=ation eBists
"eca=se the <677 is fo=nd "y compo=nding at the WACC while the 677 is fo=nd "y
compo=nding at the 677. 6n other words$ if we compo=nd the inflows at the 677
to find the T$ we will get a larger T than if we compo=nd at the WACC. Then$
the rates that ca=se the Ps of those Ts to eC=al the cost are the 677 and the
<677$ respecti#ely.
As a res=lt$ statement c is correctPif the 677 eBceeds the WACC$ the 677 will
eBceed the <677. The other statements are all false.
0/ . #IRR
Answer: e +AR$
0.. NPV an )ro1ect select(on Answer: c +AR$
Statement c is tr=e$ while the other statements are all false. 6f we draw an
NP profile graph$ we wo=ld see that A m=st ha#e the steeper slope. 6f the
crosso#er is at 1'$ and the WACC is at 1&'$ then 4 will ha#e the higher NP.
00. 2hoos(n- a,on- ,&t&ally e3cl&s('e )ro1ects Answer: c +AR$
03. #&lt()le IRRs Answer: c +AR$
Statement c is tr=e$ while the other statements are all false. @ne co=ld
calc=late the two 677s and the <677$ "=t the data in the pro"lem are correct$
so this is not necessary.
01
. Paybac! )er(o Answer: b
Time line 8in tho=sands9)

&

1 * + / . 0 3 1 2 1& (rs.

C:s ,1.& +& +& +& +& +. +. +. +. +. /&
C=m=lati#e
C:s ,1.& ,1*& ,2& ,0& ,+& .
The project will completely reco#er the initial in#estment after -+&H-+. % &.10
of (ear .)
Pay"ac; % / N
-+.
-+&
% /.10 years.
02. Paybac! )er(o Answer: c
& 1 * + / . 0 1& (ears

C: ,1&& ,.&& 1&& 11& 1*1 1++.1 1/0./1
C=m=lati#e
NC: ,1&& ,0&& ,.&& ,+2& ,*02 ,1+..2 1&..1
Pay"ac; % . N
-1/0./1
-1+..2
% ..2*1 years 0 years.
3&. $(sco&nte )aybac! Answer: e
The P of the o=tflows is ,-3&& million. To find the disco=nted pay"ac; yo=
need to ;eep adding cash flows =ntil the c=m=lati#e Ps of the cash inflows
eC=al the P of the o=tflow)
5isco=nted
(ear Cash :low Cash :low Q 1&' C=m=lati#e P
& ,-3&& million ,-3&&.&&&& ,-3&&.&&&&
1 *&& million 111.111* ,.11.1111
* +3& million +&..31.1 ,*1*.+203
+ **. million 102.&/.1 ,/+.+.&2
/ 3&& million /31.1&2/ /+/.3.1.
The pay"ac; occ=rs somewhere in (ear /. To find o=t eBactly where$ we
calc=late -/+.+.&2H-/31.1&2/ % &.&2&3 thro=gh the year. Therefore$ the
disco=nted pay"ac; is +.&21 years.
31
. $(sco&nte )aybac! Answer:
5isco=nted
& ,-+$&&& ,-+$&&&.&& ,-+$&&&.&&
1 1$&&& 2&2.&2 ,*$&2&.21
* 1$&&& 1*0./. ,1$*0/./0
+ 1$&&& 3.1.+1 ,.1+.1.
/ 1$&&& 01+.&1 102.10
After (ear +$ yo= can see that yo= wonEt need all of (ear / cash flows to "rea;
e#en. To find the portion that yo= need$ calc=late -.1+.1.H-01+.&1 % &.3..
Therefore$ the disco=nted pay"ac; is +.3. years.
3*. NPV Answer: a
:inancial calc=lator sol=tion 8in tho=sands9)
Project J) 6np=ts) C:
&
% ,1&&M C:
1
% .&M C:
*
% /&M C:
+
% +&M
C:
/
% 1&M 6H(7 % 1..
@=tp=t) NP
J
% ,&.1++ % ,-1++.
Project K) 6np=ts) C:
&
% ,1&&M C:
1
% 1&M C:
*
% +&M C:
+
% /&M
C:
/
% 0&M 6H(7 % 1..
@=tp=t) NP
K
% ,1.&1/ % ,-1$&1/.
At a WACC of 1.'$ "oth projects ha#e negati#e NPs and sho=ld "e rejected.
3+. NPV Answer: a
:inancial calc=lator sol=tion)
Project A) 6np=ts) C:
&
% ,.&&&&M C:
1
% 1.0*.M N
j
% .M 6H(7 % 1&.
@=tp=t) NP % -2$*+1.&/.
Project 4) 6np=ts) C:
&
% ,.&&&&M C:
1
% &M N
j
% /M C:
*
% 22.&&M 6H(7 % 1&.
@=tp=t) NP % -11$311.03.
3/
NP
4
R NP
A
M -11$311.03 R -2$*+1.&/M Choose Project 4.
. IRR Answer: c
6np=ts) C:
&
% ,*&&&&&M C:
1
% //.&+M N
j
% 1&. @=tp=t) 677 % 11'.
3.
. IRR Answer: c
6np=ts) C:
&
% &M C:
1
% ,1&&M N
j
% 12M C:
*
% +*1&. @=tp=t) 677 % ..&'.
30
. IRR0 )aybac!0 an ,(ss(n- cash flow Answer:
Step 1) 5etermine the cash o=tflow at t % &)
The pay"ac; is *.*. years$ so the cash flow will "e)
C:
&
% ,SC:
1
N C:
*
N &.*.8C:
+
9T
% ,S-.&& N -+&& N &.*.8-/&&9T
% ,-2&&.
Step *) Calc=late the 677)
C:
&
% ,2&&M C:
1
% .&&M C:
*
% +&&M C:
+
% /&&M C:
/
% 0&&M and then sol#e for
677 % ++./2' ++..'.
33. IRR an ,&t&ally e3cl&s('e )ro1ects Answer:
4eca=se the two projects are m=t=ally eBcl=si#e$ the project with the higher
positi#e NP is the F"etterG project.
Project S
6np=ts) C:
&
% ,11&&M C:
1
% 1&&&M C:
*
% +.&M C:
+
% .&M 6H(7 % 1*.
@=tp=ts) NP % -1&3./0M 677 % *&./0'.
Project >
6np=ts) C:
&
% ,11&&M C:
1
% &M C:
*
% +&&M C:
+
% 1.&&M 6H(7 % 1*.
@=tp=ts) NP % -*&0.1+M 677 % 12.&1'.
Project > is the F"etterG project "eca=se it has the higher NPM its 677 %
12.&1'.
31. NPV an IRR Answer: b
Project S) 6np=ts) C:
&
% ,1&&&M C:
1
% .&&M N
j
% +M 6H(7 % 1&.
@=tp=ts) -*/+./+M 677 % *+.+1'.
Project >) 6np=ts) C:
&
% ,*&&&M C:
1
% 001.30M N
j
% .M 6H(7 % 1&.
@=tp=ts) -.+..1+M 677 % *&'.
al=e sacrificed) -.+..1+ , -*/+./+ % -*21.3&.
32
. NPV an IRR Answer: e
&
% ,.&&&&M C:
1
% 1&&&&M C:
*
% 1.&&&M C:
+
% /&&&&M C:
/
%
*&&&&M 6H(7 % 1&.
@=tp=ts) NP % -1.$*&&./0 U -1.$*&&M 677 % *1.+1'.
&
% ,+&&&&M C:
1
% 0&&&M C:
*
% 1*&&&M C:
+
% 11&&&M
C:
/
% 1*&&&M 6H(7 % 1&.
@=tp=ts) NP % -3$&21.3+ U -3$&2*M 677 % 12.*1'.
Project A has the highest 677$ so the answer is -1.$*&&.
1&
. NPV0 IRR0 an )aybac! Answer:
Pay"ac; % * N -+&&H-.&& % *.0 years.
Vsing the cash flow register$ calc=late the NP and 677 as follows)
6np=ts) C:
&
% ,1&&&M C:
1
% /&&M C:
*
% +&&M C:
+
% .&&M C:
/
% /&&M 6H(7 % 1&.
@=tp=ts) NP % -*0&./+ -*0&M 677 % *1.**'.
11. Paybac! )er(o Answer: c
Step 1) Calc=late the P of the cash flows)
6np=ts) N % .M 6H(7 % 1&M P<T % 0&&&&M : %&.
@=tp=t) P % ,-**3$//3.*1. P of cash flows % -**3$//3.*1 U
-**3$//3.
Step *) Calc=late the (ear & o=tflow)
The o=tflow at t % & is J where -**3$//3 , J % -3.$&&&. J or C:
&
% ,
-1.*$//3.
Step +) Calc=late the reg=lar pay"ac;)
(ear C: C=m=lati#e C:
& ,-1.*$//3 ,-1.*$//3
1 0&$&&& ,2*$//3
* 0&$&&& ,+*$//3
+ 0&$&&& *3$..+
/ 0&$&&& 13$..+
. 0&$&&& 1/3$..+
So the pay"ac; is * N
-0&$&&&
-+*$//3
% *../ years.
1*
. $(sco&nte )aybac! Answer:
Project A)
5isco=nted
& ,-1&&$&&& ,-1&&$&&&.&& ,-1&&$&&&.&&
1 /&$&&& +0$+0+.0/ ,0+$0+0.+0
* /&$&&& ++$&.3.1. ,+&$.31..1
+ /&$&&& +&$&.*..2 ,.*..2*
/ +&$&&& *&$/2&./2 12$20/..3
Project AEs disco=nted pay"ac; period eBceeds + years$ so it wo=ld not "e
accepted.
Project 4)
5isco=nted
& ,-1&$&&& ,-1&$&&&.&& ,-1&$&&&.&&
1 .&$&&& /.$/./... ,+/$./../.
* *&$&&& 10$.*1.2+ ,11$&10..*
+ +&$&&& **$.+2.// /$.**.2*
/ & & /$.**.2*
(o= can see that in (ear + the c=m=lati#e cash flow "ecomes positi#e so the
projectEs pay"ac; period is less than + years.
1+. NPV Answer:
6np=ts) C:
&
% ,1.&M C:
1
% +&M N
j
% /M C:
*
% +.M N
j
% .M C:
+
% /&M 6H(7 % 1&.
@=tp=t) NP % -.1.1+1*/ % -.1$1+1.*/ -.1$1+1.
1/
. NPV Answer: b
6np=ts) C:
&
% &M C:
1
% .M N
j
% .M C:
*
% +M N
j
% +M C:
+
% *M N
j
% *M 6H(7

%

1/.
@=tp=t) NP % *1.2+3*0 % -*1$2+3.*0.
1.. NPV Answer:
:irst$ find the #al=e of J 8the =p,front cash flow in this project9. 677 is
the rate at which yo= need to rein#est the cash flows for NP to eC=al -&. 6n
this case$ the 677 is 1*'$ so if yo= in#est all the projectEs cash flows at
1*'$ yo= sho=ld ha#e an NP of Aero.
Step 1) Calc=late the #al=e of the initial cash flow "y sol#ing for NP at a
WACC of 1*')
(o= donEt ha#e C:
&
$ so =se & as the placeholder. Enter the following
data as inp=ts in yo=r calc=lator) C:
&
% &M C:
1
% 3.&&&M N
j
% *&M and
6H(7 % 1*. Then sol#e for NP % -.0&$*&1.*3.
This is the NP when the initial cash flow is missing. The NP with the cash
flow m=st "e -&$ so that initial cash flow m=st "e W-.0&$*&1.*3.
Step *) Calc=late the projectEs NP at its WACC of 1&')
Enter the following data as inp=ts in yo=r calc=lator) C:
&
%
,.0&*&1.*3M C:
1
% 3.&&&M N
j
% *&M and 6H(7 % 1&. Then sol#e for NP %
-31$+&2.&1 -31$+&2.
10. NPV0 )aybac!0 an ,(ss(n- cash flow Answer: b
:irst$ find the missing t % & cash flow. 6f pay"ac; % *.. years$ this implies t
%

& cash flow m=st "e ,-*$&&&

, -+$&&& N 8&..9-+$&&& % ,-0$.&&.
NP % ,-0$.&& N
1.1*
-*$&&&
N
*
81.1*9
-+$&&&
N
+
81.1*9
-+$&&&
N
/
81.1*9
-1$.&&
% -30..21.
6np=ts) C:
&
% ,0.&&M C:
1
% *&&&M N
j
% +&&&M C:
*
% 1.&&M 6H(7

%

1*.
@=tp=t) NP % -30..21.
13
. IRR Answer:
<achine A) 6np=ts) C:
&
% ,*&&&M C:
1
% &M N
j
% +M C:
*
% +133.
@=tp=t) 677 % 13.220' 11'.
<achine 4) 6np=ts) C:
&
% ,*&&&M C:
1
% 1+*M N
j
% /.
@=tp=t) 677 % */.&1' */'.
11
. IRR Answer: c
Project A) 6np=ts) N % 1M P % ,1&&&&M P<T % &M : % 111&&.
@=tp=t) 6H(7 % 11' % 677
A
.
Project C) 6np=ts) N % +M P % ,1*&&&M P<T % .020M : % &.
@=tp=t) 6H(7 % 12.22' *&' % 677
C
.
12. IRR Answer: e
Vsing yo=r financial calc=lator find the NP witho=t the initial cash flow)
C:
&
% &M C:
1
% 1.&M C:
*
% *&&M C:
+
% *.&M C:
/
% /&&M C:
.
% 1&&M 6H(7 % 1&M and
then sol#e for NP % -1*/.31.
This means that the initial cash flow m=st "e W3&& 8-1*/.31 , -1*/.31 %
,-3&&9. Now$ we can enter all the cash flows and sol#e for the projectEs 677.
C:
&
% ,3&&M C:
1
% 1.&M C:
*
% *&&M C:
+
% *.&M C:
/
% /&&M C:
.
% 1&&M and then sol#e
for 677 % 10.+1'.
2&. NPV an IRR Answer: a
Project S) 6np=ts) C:
&
% ,11&&M C:
1
% 2&&M C:
*
% +.&M C:
+
% .&M C:
/
% 1&M
6H(7 % 1*.
@=tp=ts) NP
S
% -*/..+M 677
S
% 1+.11'.
Project >) 6np=ts) C:
&
% ,11&&M C:
1
% &M C:
*
% +&&M C:
+
% .&&M C:
/
% 1.&M
6H(7 % 1*.
@=tp=ts) NP
>
% -+..*/M 677
>
% 1+.&2'.
Project > has the higher NP and its 677 % 1+.&2'.
21. IRR0 )aybac!0 an ,(ss(n- cash flow Answer: c
Step 1) :ind Project 1Es pay"ac;)
Project 1 C=m=lati#e
& ,1&& ,1&&
1 +& ,3&
* .& ,*&
+ /& *&
/ .& 3&
Pay"ac;
Project 1
% * N -*&H-/& % *.. years.
Project *Es pay"ac; % *.. years "eca=se weEre told the two projectsE
pay"ac;s are eC=al.
Step *) Calc=late Project *Es initial o=tlay$ gi#en its pay"ac; % *.. years)
6nitial o=tlay % ,SC:
1
N C:
*
N 8&..98C:
+
9T
% ,S-/& N -1& N 8&..98-0&9T
% ,-1.&.
Step +) Calc=late Project *Es 677)
Enter the following data in the calc=lator)
C:
&
% ,1.&M C:
1
% /&M C:
*
% 1&M C:
+
% 0&M C:
/
% 0&M and then sol#e for
677 % *&.1.'.
2*. #IRR Answer:
T 6np=ts) N % 1M 6H(7 % 1*M P % &M P<T % 3++&0.
@=tp=t) : % ,-2&1$0/1.+1.
<677 6np=ts) N % 1M P % ,*3.&&&M P<T % &M : % 2&10/1.+1.
@=tp=t) 6H(7 % 10.&'.
2+. #IRR Answer: e
Step 1) :ind the : of the cash inflows "y first finding the NP of these
inflows and then finding the : of their NP.
C:
&
% &M C:
1,*
% *.&&&M C:
+,.
% .&&&&M 6H(7 % 1*M and then sol#e for NP
% -1+3$213..+.
N % .M 6H(7 % 1*M P % ,1+3213..+M P<T % &M and then sol#e for : %
-*/+$111.11.
Step *) :ind the <677$ which is the disco=nt rate that eC=ates the cash
inflows and o=tflows)
N % .M P % ,1&&&&&M P<T % &M : % */+111.11M and then sol#e for 6H(7
% <677 % 12./.'.
2/. #IRR Answer:
:irst$ calc=late the present #al=e of costs)
N % /M 6H(7 % 1&M P<T % &M : % 1&&&&M and then sol#e for P %
,-0$1+&.1+.
Add ,-1&&$&&& N ,-0$1+&.1+ % ,-1&0$1+&.1+.
:ind the terminal #al=e of inflows)
C:
&
% &M C:
1
% .&&&&M C:
*
% .&&&&M C:
+
% .&&&&M C:
/
% &M 6H(7 % 1&.
Sol#e for NP % -1*/$+/*.0&.
Vse the T< ;eys to calc=late the f=t=re #al=e of this present #al=e.
N % /M 6H(7 % 1&M P % ,1*/+/*.0&M P<T % &. Sol#e for : % -11*$&.&.
Sol#e for <677)
N % /M P % ,1&01+&.1+M P<T % &M : % 11*&.&M and then sol#e for 6H(7 % <677 %
1/.*.'.
2.. #IRR Answer: e
Calc=late T 8Terminal #al=e9 of inflows)
6np=ts) C:
&
% &M C:
1
% &M C:
*
% .&&&&&M N
j
% /M C:
+
% 1&&&&&&M 6H(7 % 1*.
@=tp=t) NP % -1$10*$.2&.0..
6np=ts) N % 0M 6H(7 % 1*M P % ,110*.2&.0.M P<T % &.
@=tp=t) : % -+$030$/*+.01.
Calc=late P of costs)
6np=ts) C:
&
% ,1&&&&&&M C:
*
% ,1&&&&&&M 6H(7 % 1*.
@=tp=t) NP % ,-1$12*$1.3.1/.
Calc=late <677)
6np=ts) N % 0M P % ,112*1.3.1/M P<T % &M : % +030/*+.01.
@=tp=t) 6H(7 % <677 % 11.022.' 11.3&'.
20. #IRR Answer: e
Time line)
& 1 * +
L L L L
,*&& 1*& ,.& 3&&
1.&..*1
,+2.1.23
,*+2.1.23 1.&..*1
*
9 1* . 1 8
1
<677 % !
81.1*9
*
1*'
Vsing yo=r financial calc=lator$ enter the following data as inp=ts)
N % +M P % ,*+2.1.23M P<T % &M and : % 1.&..*1. Then sol#e for 6H(7 % <677 %
.*./2&1' .*./2'.
23
. #IRR Answer: e
Step 1) :ind the P of the cash o=tflows 8in millions of dollars9)
P % ,-+&& N ,-1&&H1.1& % ,-+2&.2&21.
Step *) :ind the : of the cash inflows 8in millions of dollars9)
: % -3&81.1&9
*
N -1*.81.1&9 N -3&&
% -1/.3& N -1+3.. N -3&&
% -2**.*&.
Step +) :ind the <677)
N % /M P % ,+2&.2&21M P<T % &M : % 2**.*&M and then sol#e for 6H(7 %
<677 % *+.2+'.
Time line)
& 1 * + /
L L L L L
,+&& ,1&& 3& 1*. 3&&.&&
,2&.2&21 1+3..&
1/.3&
,+2&.2&21 2**.*&

<677 % *+.2+'
1&'
21. #IRR an ,(ss(n- cash flow Answer:
The =p,front cost can "e calc=lated =sing the pay"ac;)
-/&& N 8-.&&98&..9 % -0.&.
The terminal #al=e of the cash inflows are)
8-/&&981.19
*
N 8-.&&981.19 N -*&& % -1$*+/.
Vse yo=r calc=lator to o"tain the <677)
Enter N % +M P % ,0.&M P<T % &M : % 1*+/M and then sol#e for <677 % 6H(7 %
*+.1*'.
22. #IRR0 )aybac!0 an ,(ss(n- cash flow Answer:
Step 1) Sol#e for the C:
&
"y ;nowing the pay"ac; is eBactly *.&)
The C:
&
for the project is -1 N -1.. % -*.. million.
Step *) :ind the : of the cash inflows)
: % -*..& N 8-*.&&981.1*9
1
N 8-1..&981.1*9
*
N 8-1.&&981.1*9
+
% -*..& N -*.*/ N -1.1110& N -1./&/2+
% -1.&*0.+& million.
Step +) Sol#e for the <677)
Enter the following inp=t data in the calc=lator)
N % /M P % ,*..M P<T % &M : % 1.&*0.+&M and then sol#e for
6H(7 % <677 % ++.1.111' ++.10'.
1&&
. #&t&ally e3cl&s('e )ro1ects Answer: b
&
% ,1&&&&&M C:
1
% +2.&&M N
j
% +.
@=tp=t) 677
A
% 1.22*' 2.&'.
&
% ,1&&&&&M C:
1
% &M N
j
% *M C:
*
% 1++&&&.
@=tp=t) 677
4
% 2.23*' 1&.&'.
1&1The firmEs cost of capital is not gi#en in the pro"lemM so =se the 677
decision r=le. Since 677
4
R 677
A
M Project 4 is preferred.
. /efore;ta3 cash flows Answer: b
Time line)
&
677 % 1.'
1 * + / 1& (ears
,1&$&&& P<T % ! P<T P<T P<T P<T

6np=ts) N % 1&M 6H(7 % 1.M P % ,1&&&&M : % &. @=tp=t) P<T % -1$22*..*.
4efore,taB C: % -1$22*..*H&.0 % -+$+*&.13 -+$+*1.
1&*. NPV Answer: c
Step 1) 7=n a regression to find the corporate "eta. 6t is 1.10++.
Step *) :ind the projectEs estimated "eta "y adding &.* to the corporate "eta.
The project "eta is th=s 1.+0++.
Step +) :ind the companyEs cost of eC=ity$ which is its WACC "eca=se it =ses
no de"t)
r
s
% WACC % 3' N 8.'91.+0++ % 1+.110.' 1+.1*'.
Step /) Now find NP 8in millions9)
C:
&
% ,1&&M C:
1,.
% *&M C:
0,1&
% +&M 6H(7 % 1+.1*M and then sol#e for NP
% -*+.11 million.
1&+. NPV Answer: c
Step 1) 7=n a regression to find the corporate "eta. <ar;et ret=rns are the
J,inp=t #al=es$ while (Es ret=rns are the (,inp=t #al=es. 4eta is
1.*1&*.
Step *) :ind the projectEs estimated "eta "y s="tracting &.. from the
corporate "eta. The project "eta is th=s 1.*1&* , &.. % &.31&*.
Step +) :ind the projectEs cost of eC=ity$ which is its WACC "eca=se it =ses
no de"t)
r
s
% WACC % .' N 811' , .'9&.31&* % 2.*0'.
Step /) Now find the projectEs NP 8inp=ts are in millions9)
C:
&
% ,.&&M C:
1,.
% 1&&M C:
0,1&
% .&M 6H(7 % 2.*0'M and then sol#e for
NP % -1&./* million.
1&/
. #IRR an NPV Answer: c
:ind the <677 of the Projects.
Time line for Project J)

& 1 * + / (ears
L L L L L
,*$&&& *&& 0&& 1&& 1$/&&.&&
120.&&
3.*.0/
*1&.22
Terminal al=e 8T9 % +$+*2.0+
,*$&&&
WACC % 1*'
<677 % !
81.1*9
81.1*9
*

<677J % ! 1+..2'
81.1*9
+

Time line for Project ()

& 1 * + / (ears
L L L L L
,*$&&& *$&&& *&& 1&& 3..&&
11*.&&
*.&.11
*$1&2.10
Terminal al=e 8T9 % +$*/3.3/
,*$&&&
WACC % 1*'
<677 % !
81.1*9
81.1*9
*

<677( % ! 1*.12'
81.1*9
+

Calc=late NP of Projects)
Project J) 6np=ts) C:
&
% ,*&&&M C:
1
% *&&M C:
*
% 0&&M C:
+
% 1&&M C:
/
% 1/&&M
6H(7 % 1*.
@=tp=t) NP
J
% -110.&/.
Project () 6np=ts) C:
&
% ,*&&&M C:
1
% *&&&M C:
*
% *&&M C:
+
% 1&&M C:
/
% 3.M
6H(7 % 1*.
@=tp=t) NP
(
% -0+.22.
Note that the "etter project is J "eca=se it has a higher NP. 6ts
corresponding <677 % 1+..2'. 8Also note that since the * projects are of eC=al
siAe that the project with the higher <677 will also "e the project with the
higher NP.9
1&.. #IRR an ,(ss(n- cash flow Answer: b
Step 1) 5etermine the P of cash o=tflows and the : of cash inflows. The P
of all cash o=tflows is ,-.&& N ,JH81.1&9
*
. The : of all cash
inflows is -.&& N -+&&81.19 N -*&&81.19
+
% -.&& N -++& N -*00.*& %
-1$&20.*&.
Step *) :ind the P of the f=t=re #al=e of cash inflows =sing the <677. N % /M
6H(7 % 1*M P<T % &M : % 1&20.*&M and then sol#e for P % -020.0..
Step +) 5etermine the #al=e of the missing cash o=tflow.
,-020.0. % ,-.&& , JH81.1&9
*
,-120.0. % ,JH1.*1
,-*+3.2. % ,J
-*+3.2. % J.
1&0. #IRR an ,(ss(n- cash flow Answer: b
Step 1) 5etermine the missing cash o=tflow)
The pay"ac; is * years so the project m=st ha#e cash inflows thro=gh t
% * that eC=al its cash o=tflow.
,C:
&
% C:
1
N C:
*
M C:
&
% ,8-1&&$&&& N -*&&$&&&9M C:
&
% ,-+&&$&&&.
Step *) Calc=late the present #al=e of the cash o=tflows)
C:
&
% ,+&&&&&M C:
1
% &M C:
*
% &M C:
+
% &M C:
/
% ,1&&&&&M 6H(7 % 1&M and
then sol#e for NP % ,-+01$+&1.+/...
Step +) Calc=late the f=t=re #al=e of the cash inflows)
C:
&
% &M C:
1
% 1&&&&&M C:
*
% *&&&&&M C:
+
% *&&&&&M C:
/
% &M 6H(7 % 1&M
and then sol#e for NP % -/&0$/01.+&3+.
N % /M 6H(7 % 1&M P % ,/&0/01.+&3+M P<T % &M and then sol#e for : %
-.2.$1&&.
Step /) Calc=late the <677)
N % /M P % ,+01+&1.+/..M P<T % &M : % .2.1&&M and then sol#e for
6H(7 % <677 % 1*.3//1' 1*.3/'.
1&3. #IRR Answer: e
:irst$ find the companyEs weighted a#erage cost of capital)
WeEre gi#en the "efore,taB cost of de"t$ r
d
% 1&'. We can find the cost of
eC=ity as follows)
r
s
% &.&0 N &.&.81.19 % &.11. or 11..'.
Th=s$ the WACC is) r % &./8&.1&981 , &.+9 N &.08&.11.9 % &.&23 or 2.3'.
Second$ the P of all cash o=tflows can "e calc=lated as follows)
C:
&
% ,.&&&&M C:
1,+
% &M C:
/
% ,/&&&&M 6H(7 % 2.3.
Sol#e for NP of costs % ,-33$0*&.0*.
Third$ find the terminal #al=e of the project at t % /)
C:
&
% &M C:
1
% +.&&&M C:
*
% /+&&&M C:
+
% 0&&&&M C:
/
% &M 6H(7 % 2.3.
Sol#e for NP % -11+$&10.30.
Vse the T< ;eys to calc=late the f=t=re #al=e of this present #al=e.
N % /M 6H(7 % 2.3M P % ,11+&10.30M P<T % &. Sol#e for : % -10+$331./1.
:inally$ calc=late the <677)
N % /M P % ,330*&.0*M P<T % &M : % 10+331./1M and then sol#e for 6H(7 % <677
% *&..*'.
1&1
. #IRR Answer: b
&
% 1*'
1 1& 11 *&

,3$&&& .&& ,.&&

.&& .&&
,101
,3$101 % P of o=tflows T of inflows) +/$/3+.+&
Calc=lation of P of o=tflows)
C:
&
% ,3&&&M C:
1,2
% &M C:
1&
% ,.&&M 6H(7 % 1*M and then sol#e for NP %
,-3$10&.22 ,-3$101.
Calc=lation of T of inflows)
C:
&
% &M C:
1,2
% .&&M C:
1&
% &M C:
11,*&
% .&&M 6H(7 % 1*. Sol#e for NP %
-+$.3+.3/.
Vse T< to calc=late the f=t=re #al=e of the present #al=e. N % *&M 6H(7 % 1*M
P % ,+.3+.3/M P<T % &. Sol#e for : % -+/$/3+.+&.
Calc=lation of <677)
N % *&M P % ,3101M P<T % &M : % +//3+.+&M and then sol#e for 6H(7 % <677 %
1.13'.
Note) 677 % *..*' and NP % ,-+$.13$*.1. 4oth are consistent with <677 less
than WACC % 1*'.
1&2. PV of cash flows Answer: c
@ld lease) 6np=ts) N % 0&M 6H(7 % 11H1* % &.2103M P<T % 1&&&M : % &.
@=tp=t) P % ,-/.$22+.&+.
New lease) C:
&
% &M C:
1,0
% &M C:
3,0&
% 1&.&M 6H(7 % 11H1* % &.2103M and then
sol#e for NP % ,-/*$112.23.
Therefore$ the P of payments =nder the proposed lease wo=ld "e less than the
P of payments =nder the old lease "y -/.$22+.&+ , -/*$112.23 % -+$1&+.&0.
Sally sho=ld accept the new lease "eca=se it wo=ld raise her theoretical net
worth "y -+$1&+.&0.
11&. Paybac! )er(o Answer: b
Pay"ac; is how long it ta;es for a firm to reco=p its initial in#estment.
Project C=m=lati#e
& ,-+&& ,-+&&
1 1*. ,13.
* 3. ,1&&
+ *&& 1&&
/ 1&& *&&
Therefore$ the project has a pay"ac; of * N -1&&H-*&& % *.. years.
111. $(sco&nte )aybac! Answer:
We m=st find the Ps of the cash flows =sing the firmEs 1&' WACC.
5isco=nted
& ,-+&& ,-+&&.&& ,-+&&.&&
1 1*. 1*.H1.1& % 11+.0/ ,110.+0
* 3. 3.H81.1&9
*
% 01.21 ,1*/.+1
+ *&& *&&H81.1&9
+
% 1.&.*0 N*..11
/ 1&& 1&&H81.1&9
/
% 01.+& N2/.11
Therefore$ the projectEs disco=nted pay"ac; is * N
*0 . 1.& -
+1 . 1*/ -
% *.1+ years.
11*. IRR Answer:
C:
&
% ,+&&M C:
1
% 1*.M C:
*
% 3.M C:
+
% *&&M C:
/
% 1&&M and then sol#e for 677 %
*+./*'.
11+. NPV Answer: c
:inancial calc=lator)
C:
&
% ,+&&M C:
1
% 1*.M C:
*
% 3.M C:
+
% *&&M C:
/
% 1&&M 6H(7 % 1&M and sol#e for
NP % 2/.11 % -2/.11 million.
11/. #IRR Answer: c
To calc=late the <677$ we need to find the P of all the o=tflows and the : of
all the inflows. The disco=nt rate that eC=ates the two is the <677.
P of inflows : of o=tflows
,-+&& -1*. 1.1&
+
% -100.+3.
- 3. 1.1&
*
% 2&.3.&
-*&& 1.1&
1
% **&.&&&
-1&& 1.1&
&
% 1&&.&&&
-.33.1*.
Vsing a financial calc=lator)
N % /M P % ,+&&M P<T % &M : % .33.1*.M and then sol#e for 6H(7 % <677 % 13.33'.
11.. NPV Answer:
C:
&
% ,+&&M C:
1
% 1&&M C:
*
% 1.&M C:
+
% *&&M C:
/
% .&M 6H(7 % 1&M and then sol#e
for NP % -22.*2.
110. IRR Answer:
C:
&
% ,+&&M C:
1
% 1&&M C:
*
% 1.&M C:
+
% *&&M C:
/
% .&M sol#e for 677% */.32'.
113. #IRR Answer: e
& 1 * + /
L L L L L
,+&& 1&& 1.& *&& .&.&
**&.&
111..
1++.1
,+&& .1/.0
1&'
<677 % !
1.1
81.19
*

81.19
+

All the cash o=tflows are disco=nted "ac; to the present. The f=t=re #al=e of
all cash inflows are compo=nded to (ear /.
N % /M P % ,+&&M P<T % &M : % .1/.0&M and then sol#e for 6H(7 % <677 % 11.1.'.
111. NPV Answer: b
Vsing a financial calc=lator) C:
&
% ,.&&&M C:
1
% .&&&M C:
*
% +&&&M C:
+
%
,1&&&M 6H(7 % 1&M and then sol#e for NP % -1$*3+./1 -1$*3+.
112. #IRR Answer: c
Step 1) The P of all cash o=tflows is)
,-.$&&& N ,-1$&&&H81.1&9
+
% ,-.$3.1.+1/1.
Step *) The : of all cash inflows is)
-.$&&&81.1&9
*
N -+$&&&81.1&9 % -2$+.&.&&.
Step +) Now calc=late the <677 as follows)
N % +M P % ,.3.1.+1/1M P<T % &M : % 2+.&.&&M and then sol#e for 6H(7
% 13..1' 13.0' % <677.
1*&. #(ss(n- cash flow0 )aybac! )er(o0 an NPV Answer: a
6f the project has a pay"ac; period of * years$ then J % * -13. % -+.&.
N=merical sol=tion)
The NP is W-+.& N -13.H81.1&9 N -13.H81.1&9
*
N -+&&H81.1&9
+
% -132.11.
Enter the following data in yo=r calc=lator) C:
&
% ,+.&M C:
1
% 13.M C:
*
% 13.M
C:
+
% +&&M 6H(7 % 1&M and then sol#e for NP % -132.11.
1*1. #(ss(n- cash flow0 IRR0 an NPV Answer: c
N=merical sol=tion)
To ha#e an 677 of 1.'$ the NP at 1.' is Aero. So)
,J N -13.H81.1.9 N -13.H81.1.9
*
N -+&&H81.1.9
+
% &$ or J % -/11.3.+2.
So$ the NP with a WACC of 1*' is calc=lated as follows)
NP % W-/11.3.+2 N -13.H81.1*9 N -13.H81.1*9
*
N -+&&H81.1*9
+
% -*3..+21
-*3../.
Step 1) :ind the missing cash flow "y entering the following data in yo=r
calc=lator)
C:
&
% &M C:
1
% 13.M C:
*
% 13.M C:
+
% +&&M 6H(7 % 1.M and then sol#e for
NP % -/11.3.+2.
Step *) Calc=late the NP at a WACC of 1*')
C:
&
% ,/11.3.+2M C:
1
% 13.M C:
*
% 13.M C:
+
% +&&M 6H(7 % 1*M and then
sol#e for NP % -*3..+21 -*3../.
1**. NPV Answer:
C:
&
% ,.&&M C:
1
% 1.&M C:
*
% *&&M C:
+
% *.&M C:
/
% 1&&M 6H(7 % 1&M and then sol#e
for NP % -.3.31.
1*+. IRR Answer: a
C:
&
% ,.&&M C:
1
% 1.&M C:
*
% *&&M C:
+
% *.&M C:
/
% 1&&M and then sol#e for 677
% 1..+*'.
1*/. #IRR Answer: b
:irst$ find the P of all cash o=tflows)
P % ,-.&& N ,-+&&H81.1&9
/
% ,-3&/.2&.
Second$ find the : of all cash inflows)
: % -+&& 81.1&9
+
N -+&& 81.1&9
*
N -+.& 81.1&9
1
% -1$1/3.+&.
:inally$ find the <677 =sing these two #al=es "y entering the following data
into yo=r financial calc=lator)
N % /M P % ,3&/.2&M P<T % &M : % 11/3.+&M and then sol#e for 6H(7 % <677 %
1*.2.'.

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Basics of Capital Budgeting

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(Difficulty Levels: Easy, Easy/Medium, Medium, Medium/Hard, and Hard)

PART I !e" and Revised #arry$ver Pr$%lems and &uesti$ns

,1&$&&& P<T % ! P<T P<T P<T P<T

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