Homework Assignment for Week 6:
For Week 6, please turn in the answers to the following questions:
- Scott Enterprises is considering a project that has the following cash flow and cost of capital (r) data. What is the project’s NPV? Note that if a project’s expected NPV is negative, it should be rejected.
| r: | 11.00% | ||||
| Year | 0 | 1 | 2 | 3 | 4 |
| Cash flows | −$1,000 | $350 | $350 | $350 | $350 |
- Reed Enterprises is considering a project that has the following cash flow and cost of capital (r) data. What is the project’s NPV? Note that a project’s expected NPV can be negative, in which case it will be rejected.
| r: | 10.00% | |||
| Year | 0 | 1 | 2 | 3 |
| Cash flows | −$1,050 | $450 | $460 | $470 |
- Hart Corp. is considering a project that has the following cash flow data. What is the project’s IRR? Note that a project’s IRR can be less than the cost of capital or negative, in both cases it will be rejected.
| Year | 0 | 1 | 2 | 3 |
| Cash flows | −$1,000 | $425 | $425 | $425 |
- Pet World is considering a project that has the following cash flow data. What is the project’s IRR? Note that a project’s IRR can be less than the cost of capital (and even negative), in which case it will be rejected.
| Year | 0 | 1 | 2 | 3 | 4 | 5 |
| Cash flows | −$9,500 | $2,000 | $2,025 | $2,050 | $2,075 | $2,100 |
- Computer Consultants Inc. is considering a project that has the following cash flow and cost of capital (r) data. What is the project’s MIRR? Note that a project’s MIRR can be less than the cost of capital (and even negative), in which case it will be rejected.
| r = | 10.00% | |||
| Year | 0 | 1 | 2 | 3 |
| Cash flows | −$1,000 | $450 | $450 | $450 |
- McGlothin Inc. is considering a project that has the following cash flow data. What is the project’s payback?
| Year | 0 | 1 | 2 | 3 |
| Cash flows | −$1,150 | $500 | $500 | $500 |
- Craig’s Car Wash Inc. is considering a project that has the following cash flow and cost of capital (r) data. What is the project’s discounted payback?
| r = | 10.00% | |||
| Year | 0 | 1 | 2 | 3 |
| Cash flows | −$900 | $500 | $500 | $500 |
- Markman & Sons is considering Projects S and L. These projects are mutually exclusive, equally risky, and not repeatable and their cash flows are shown below. If the decision is made by choosing the project with the higher IRR, how much value will be forgone? Note that under certain conditions choosing projects on the basis of the IRR will not cause any value to be lost because the project with the higher IRR will also have the higher NPV, i.e., no conflict will exist.
| r: | 10.00% | ||||
| Year | 0 | 1 | 2 | 3 | 4 |
| CFS | −$1,025 | $650 | $450 | $250 | $50 |
| CFL | −$1,025 | $100 | $300 | $500 | $700 |
- 9. What are two possible causes of conflicts between the IRR and NPV for mutually exclusive projects?
- Suppose a firm relies exclusively on the payback or discounted payback period methods when making capital budgeting decisions. What benefit does the approach of using payback methods provide and what pitfalls does this approach have?
