FIN 534 Homework Set #4

FIN 534 Homework Set #4 
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- IRR?
(b) If each project- 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- MIRR at the cost of capital of 10%? At 17%? (Hint: Consider Period 7 as the end of Project B- 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- 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- expected NPV. (Hint: Use expected values for the net cash flow in each year.)