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[71].A company choosing between two projects.  The larger project has

Question : [71].A company choosing between two projects.  The larger project has : 1416406

 

[71].A company is choosing between two projects.  The larger project has an initial cost of $100,000, annual cash flows of $30,000 for 5 years, and an IRR of 15.24%.  The smaller project has an initial cost of $51,600, annual cash flows of $16,000 for 5 years, and an IRR of 16.65%.  The projects are equally risky.  Which of the following statements is CORRECT?

 

a.Since the smaller project has the higher IRR, the two projects’ NPV profiles cannot cross, and the smaller project's NPV will be higher at all positive values of WACC.

b.Since the smaller project has the higher IRR, the two projects’ NPV profiles will cross, and the larger project will look better based on the NPV at all positive values of WACC.

c.If the company uses the NPV method, it will tend to favor smaller, shorter-term projects over larger, longer-term projects, regardless of how high or low the WACC is.

d.Since the smaller project has the higher IRR but the larger project has the higher NPV at a zero discount rate, the two projects’ NPV profiles will cross, and the larger project will have the higher NPV if the WACC is less than the crossover rate.

e.Since the smaller project has the higher IRR and the larger NPV at a zero discount rate, the two projects’ NPV profiles will cross, and the smaller project will look better if the WACC is less than the crossover rate.

 

[72].McCall Manufacturing has a WACC of 10%.  The firm is considering two normal, equally risky, mutually exclusive, but not repeatable projects.  The two projects have the same investment costs, but Project A has an IRR of 15%, while Project B has an IRR of 20%.  Assuming the projects' NPV profiles cross in the upper right quadrant, which of the following statements is CORRECT?

 

a.Each project must have a negative NPV.

b.Since the projects are mutually exclusive, the firm should always select Project B.

c.If the crossover rate is 8%, Project B will have the higher NPV.

d.Only one project has a positive NPV.

e.If the crossover rate is 8%, Project A will have the higher NPV.

 

 

[73].Projects A and B are mutually exclusive and have normal cash flows.  Project A has an IRR of 15% and B's IRR is 20%.  The company’s WACC is 12%, and at that rate Project A has the higher NPV.  Which of the following statements is CORRECT?

 

a.The crossover rate for the two projects must be less than 12%.

b.Assuming the timing pattern of the two projects’ cash flows is the same, Project B probably has a higher cost (and larger scale).

c.Assuming the two projects have the same scale, Project B probably has a faster payback than Project A.

d.The crossover rate for the two projects must be 12%.

e.Since B has the higher IRR, then it must also have the higher NPV if the crossover rate is less than the WACC of 12%.

 

[74].Which of the following statements is CORRECT?  Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.

 

a.A project’s MIRR is always greater than its regular IRR.

b.A project’s MIRR is always less than its regular IRR.

c.If a project’s IRR is greater than its WACC, then the MIRR will be less than the IRR.

d.If a project’s IRR is greater than its WACC, then the MIRR will be greater than the IRR.

e.To find a project’s MIRR, we compound cash inflows at the IRR and then discount the terminal value back to t = 0 at the WACC.

 

 

Multiple Choice:  Problems

 

[75].Anderson Systems is considering a project that has the following cash flow and WACC data.  What is the project's NPV?  Note that if a project's projected NPV is negative, it should be rejected.

 

WACC:  9.00%

Year             0   1        2        3

Cash flows-$1,000$500$500$500

 

a.$265.65

b.$278.93

c.$292.88

d.$307.52

e.$322.90

 

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

 

WACC:  11.00%

Year             0   1        2        3        4

Cash flows-$1,000$350$350$350$350

 

a.$77.49

b.$81.56

c.$85.86

d.$90.15

e.$94.66

 

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

 

WACC:  10.25%

Year             0   1        2        3        4        5

Cash flows-$1,000$300$300$300$300$300

 

a.$105.89

b.$111.47

c.$117.33

d.$123.51

e.$130.01

 

[78].Simms Corp. is considering a project that has the following cash flow data.  What is the project's IRR?  Note that a project's projected IRR can be less than the WACC or negative, in both cases it will be rejected.

 

Year             0   1        2        3

Cash flows-$1,000$425$425$425

 

a.12.55%

b.13.21%

c.13.87%

d.14.56%

e.15.29%

 

[79].Warr Company is considering a project that has the following cash flow data.  What is the project's IRR?  Note that a project's projected IRR can be less than the WACC or negative, in both cases it will be rejected.

 

Year             0   1        2        3        4

Cash flows-$1,050$400$400$400$400

 

a.14.05%

b.15.61%

c.17.34%

d.19.27%

e.21.20%

 

[80].Thorley Inc. is considering a project that has the following cash flow data.  What is the project's IRR?  Note that a project's projected IRR can be less than the WACC or negative, in both cases it will be rejected.

 

Year             0   1        2        3        4        5

Cash flows-$1,250$325$325$325$325$325

 

a. 9.43%

b. 9.91%

c.10.40%

d.10.92%

e.11.47%

 

 

 

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