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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