21) A firm is evaluating three capital projects. The net present values for the

Question

21) A firm is evaluating three capital projects. The net present values for the projects are as follows: Project 2 3 $100 $10 -$100 The firm should A) accept Project 3, and reject Projects 1 and 2 B) dccept Projects 1 and 2, and reject Project 3 accept Projects 1 and 3, and reject Project 2 D) accept all projects for the following project if its initial after-tax cost is $5,000,000 and it is expected to x operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in 22) 22) What is the IRR provide after-ta year 3, and $1,300,000 in year 4? D) 15.57% A) 0.00% B) 12.25% C) 13.57%

Explanation / Answer

21) Option [B] Accept Projects 1 and 2 (having positive NPVs), and reject Project 3 (having negative NPV) 22) IRR is that discount rate for which NPV = 0. It has to be arrived by trial and error, by varying the discount rates: Year Cash flows PVIF at 14% PV at 14% PVIF at 13% PV at 13% IRR lies between 13% and 14%. 0 -5000000 1 -5000000 1 -5000000 IRR = 13+56399/(56399+41908) = 13.57% 1 1800000 0.87719 1578947 0.88496 1592920 Answer: Option [C] 2 1900000 0.76947 1461988 0.78315 1487979 3 1700000 0.67497 1147452 0.69305 1178185 4 1300000 0.59208 769704 0.61332 797314 -41908 56399 23) Book value weight: Book Value Weight Book value of common equity 315000 0.6774 Bokk value of LT debt 150000 0.3226 465000 1.0000 WACC = 8*0.3226+19*0.6774 = 15.5% Answer: Option [A] 24) NPV = -$1,494,336 Year Cash flows PVIF at 12% PV at 12% Option [C] 0 -5000000 1 -5000000 1 1800000 0.89286 1607143 2 1900000 0.79719 1514668 3 1700000 0.71178 1210026 4 -1300000 0.63552 -826174 25) Payback = 50000/15000 = 3.3 years -1494336 Option [D]

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