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Category: Business and Industry
Date Submitted: 02/17/2011 09:49 AM
1) You are evaluating a project that is expected to cost $2.2 million in initial investment and it is expected to generate an end of year cash flow of $1.0 million each year for three years. The discount rate is 11%. What is the MIRR of this investment?
10.89%
The same as the IRR in this case.
17.27%
14.96%
11%
For the MIRR, you have to find the future value of each cash inflow as of the end of year 3:
CF3: the FV is simply $1 million, since you receive it at t=3.
CF2: compound 1 period forward
1 million (1.11) = 1.11 million
CF1: compound 2 periods forward
1 million (1.11)2 = 1.232 million
The sum of these future values is:
1+1.11+1.232 = 3.342
Now find the interest rate that equates the PV of 2.2 with the FV of 3.342:
N: 3
I: ? 14.96%
PV: (2.2)
PMT: 0
FV: 3.342
2) Project Z’s only cash outflow is its cost of $10,000. The project has a NPV of $16,000. What is the profitability index for this project?
1.2
2.6
1.7
1.6
0.6
You first need to find the PV (inflows):
NPV=PV (inflows)- PV (outflows)
16,000=PV (inflows)- 10,000
PV (inflows)=26,000
So:
PI=(PV (inflows))/(PV (outflows))=26,000/10,000=2.6
3) If a project has an IRR that is equal to the discount rate, the NPV for the project is:
Neither here nor there
Either positive or negative
Negative
Zero
Positive
4) The Green Thumb Landscaping Company can purchase equipment on sale for $3200. The asset has a two-year life, and will produce $800 in the first year, and $3000 in the second year. The cost of capital is 15%. Should this project be accepted?
No
Yes
Maybe so
I don’t know
Using either the NPV or the IRR will provide the same decision:
NPV = -235.92
IRR = 10.13%
5) The factors that cause problems with the use of IRR in projects that are mutually exclusive are:
Scale and reversing flow problems
Timing and scale problems
The differential equations problem
The IRR complexity problem and the scale problem