26 May Question [i]. As the director of capital budgeting for Raleigh/Durham
Question
[i]. As the director of capital budgeting for Raleigh/Durham Company, you are evaluating two mutually exclusive projects with the following net cash flows:
Project X Project Z
Year Cash Flow Cash Flow
0 -$100 -$100
1 50 10
2 40 30
3 30 40
4 10 60
Is there a crossover point in the relevant part of the NPV profile graph (the northeast, or upper right, quadrant)?
a. No.
b. Yes, at k» 7%.
c. Yes, at k» 9%.
d. Yes, at k» 11%.
e. Yes, at k» 13%.
[ii]. Your company is considering two mutually exclusive projects, X and Y, whose costs and cash flows are shown below:
Project X Project Y
Year Cash Flow Cash Flow
0 -$2,000 -$2,000
1 200 2,000
2 600 200
3 800 100
4 1,400 75
The projects are equally risky, and the firm’s cost of capital is 12 percent. You must make a recommendation, and you must base it on the modified IRR (MIRR). What is the MIRR of the better project?
a. 12.00%
b. 11.46%
c. 13.59%
d. 12.89%
e. 15.73%
[iii]. Florida Phosphate is considering a project that involves opening a new mine at a cost of $10,000,000 at t = 0. The project is expected to have operating cash flows of $5,000,000 at the end of each of the next
4 years. However, the facility will have to be repaired at a cost of $6,000,000 at the end of the second year. Thus, at the end of Year 2 there will be a $5,000,000 operating cash inflow and an outflow of
-$6,000,000 for repairs. The company’s weighted average cost of capital is 15 percent. What is the difference between the project’s MIRR and its regular IRR?
a. 0.51%
b. 9.65%
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