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Business Projects & Investments Cash Flows Problems & Solutions

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1. Simkins Renovations 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 (and even negative), in which case it will be rejected.
Year
0
1
2
3
4
Cash flows
-$825
$300
$290
$280
$270
a.
12.42%
b.
17.24%
c.
11.98%
d.
14.90%
e.
14.61%
2. Fernando Designs is considering a project that has the following cash flow and WACC data. What is the project's
discounted payback?
WACC:
10.00%
Year
0
1
2
3
Cash flows
-$925
$500
$500
$500
a.
2.65 years
b.
1.70 years
c.
2.32 years
d.
2.15 years
e.
2.37 years
3. Susmel 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
-$425
$150
$200
$300
a.
2.25 years
b.
2.70 years
c.
2.52 years
d.
2.30 years
e.
2.68 years
4. Cornell Enterprises is considering a project that has the following cash flow and WACC data. What is the project's
NPV? Note that a project's projected NPV can be negative, in which case it will be rejected.
WACC:
10.00%
Year
0
1
2
3
Cash flows
-$800
$450
$460
$470
a.
$308.14
b.
$342.37
c.
$427.97
d.
$414.27
e.
$383.46
5. Last month, Lloyd's Systems analyzed the project whose cash flows are shown below. However, before the decision to
accept or reject the project, the Federal Reserve took actions that changed interest rates and therefore the firm's WACC.
The Fed's action did not affect the forecasted cash flows. By how much did the change in the WACC affect the project's
forecasted NPV? Note that a project's projected NPV can be negative, in which case it should be rejected.

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Old WACC:
10.00%
New WACC:
14.25%
Year
0
1
2
3
Cash flows
-$1,000
$410
$410
$410
a.
-$71.72
b.
-$81.76
c.
-$81.04
d.
-$58.09
e.
-$58.81
6. Yonan Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive,
equally risky, and not repeatable. If the decision is made by choosing the project with the shorter payback, some value
may be forgone. How much value will be lost in this instance? Note that under some conditions choosing projects on the
basis of the shorter payback will not cause value to be lost.
WACC:
12.25%
0
1
2
3
4
CF
S
-$950
$500
$800
$0
$0
CF
L
-$2,100
$400
$800
$800
$1,000
a.
$47.07
b.
$0.00
c.
$41.84
d.
$39.66
e.
$38.35
7. Moerdyk & Co. is considering Projects S and L, whose cash flows are shown below. These projects are mutually
exclusive, equally risky, and not repeatable. 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 one with the higher IRR will also have the higher NPV, i.e., no conflict will exist.
WACC:
8.50%
0
1
2
3
4
CF
S
-$1,025
$650
$450
$250
$50
CF
L
-$1,025
$100
$300
$500
$700
a.
$24.34
b.
$30.42
c.
$37.11
d.
$27.99
e.
$26.16
8. Your company, RMU Inc., is considering a new project whose data are shown below. What is the project's Year 1 cash
flow?
Sales revenues
$23,000
Depreciation
$8,000
Other operating costs
$12,000
Tax rate
35.0%
a.
$9,353
b.
$10,249
c.
$9,055

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1. Simkins Renovations 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 (and even negative), in which case it will be rejected. Year Cash flows 0 -$825 1 $300 2 $290 3 $280 4 $270 a. 12.42% b. 17.24% c. 11.98% d. 14.90% e. 14.61% 2. Fernando Designs is considering a project that has the following cash flow and WACC data. What is the project's discounted payback? WACC: 10.00% Year 0 Cash flows -$925 a. 2.65 years b. 1.70 years c. 2.32 years d. 2.15 years e. 2.37 years 1 $500 2 $500 3 $500 3. Susmel Inc. is considering a project that has the following cash flow data. What is the project's payback? Year Cash flows a. 2.25 years b. 2.70 years c. 2.52 years d. 2.30 years e. 2.68 years 0 -$425 1 $150 2 $200 3 $300 4. Cornell Enterprises is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected. WACC: 10.00% Year 0 Cash flows -$800 a. $308.14 b. $342.37 c. $427.97 d. $414.27 e. $383.46 1 $450 2 $460 3 $470 5. Last month, Lloyd's Systems analyzed the project whose cash flows are shown below. However, before the decision to accept or reject the project, the Federal Reserve took actions that changed interest rates and therefore the firm's WACC. The Fed's action did not affect the forecasted cash flows. By how much did the change in t ...
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