2024 – FIN 534 Homework Set 4 FIN 534 Homework Set 4 1156 5 19 2015 Page 1

FIN 534 – Homework Set #4

 

FIN 534 Homework Set #4 1156 (5-19-2015) Page 1 of 2

Directions: Answer the following questions on a separate document. Explain how you reached the answer or show your work if a mathematical calculation is needed, or both. Submit your assignment using the assignment link in the course shell. This homework assignment is worth 100 points.

Use the following information for Questions 1 through 3:

Assume you are presented with the following mutually exclusive investments whose expected net cash flows are as follows:

EXPECTED NET CASH FLOWS:

Year

Project A

Project B

0

−$400

−$650

1

−528

210

2

−219

210

3

−150

210

4

1,100

210

5

820

210

6

990

210

7

−325

210

1. (a) What is each project’s IRR?

(b) If each project’s cost of capital were 10%, which project, if either, should be selected? If the cost of capital were 17%, what would be the proper choice?

2. (a) What is each project’s MIRR at the cost of capital of 10%? At 17%? (Hint: Consider Period 7 as the end of Project B’s life.)

3. What is the crossover rate, and what is its significance?

FIN 534 – Homework Set #4

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FIN 534 Homework Set #4 1156 (5-19-2015) Page 2 of 2

Use the following information for Question 4:

The staff of Porter Manufacturing has estimated the following net after-tax cash flows and probabilities for a new manufacturing process:

Line 0 gives the cost of the process, Lines 1 through 5 give operating cash flows, and Line 5* contains the estimated salvage values. Porter’s cost of capital for an average-risk project is 10%.

Net After-Tax Cash Flows

Year P = 0.2 P = 0.6 P = 0.2

0 −$100,000 −$100,000 −$100,000

1 20,000 30,000 40,000

2 20,000 30,000 40,000

3 20,000 30,000 40,000

4 20,000 30,000 40,000

5 20,000 30,000 40,000

5* 0 20,000 30,000

4. Assume that the project has average risk. Find the project’s expected NPV. (Hint: Use expected values for the net cash flow in each year.)