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’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?**

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.)**

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