Thor\'s Hammers is considering the following two projects What is the IRR of A?

Question

Thor's Hammers is considering the following two projects What is the IRR of A? What is the MIKK of B? Your business has the return distribution is as follows. What is the expected return of your business? What is the standard deviation of the returns of your business? Consider the following project outcomes, each with a positive probability: Project Y has less uncertainty than Project X. Project X has more variability than Project Y. Since Projects X and Y have the same expected outcomes of $500, investors will view then identical in value. Since no probabilities are given, we cannot conclude which project has more uncertainty. Both a and b

Explanation / Answer

Q8

IRR

IRR is rate of return for the project which will lead to it breaking even. So let us assume IRR be r

Solving IRR for Project A

0= -100 + 70/(1+r) + 70/(1+r)^2 + 70(1+r)^3

On solving this we get IRR = 0.4872 or 48.72% i.e Option A

MIRR

While the internal rate of return (IRR) assumes the cash flows from a project are reinvested at the IRR, the modified IRR assumes that positive cash flows are reinvested at the firm's cost of capital, and the initial outlays are financed at the firm's financing cost.

So for calculating MIRR we need Cost of capital & reinvest rate so the information given is lacking i.e. Option h

Q9

Expected Return = ProbabilitynReturnn

= 0.25*0.25 + 0.35*0.15 + 0.4*-0.08= 0.083 i.e. Return, R = 8.3%

Similarly by calculation S.D = (((0.25-R)2+(0.4-R)2+(-0.08-R)2)/3)^0.5= 14.01%

Q10 Option e is correct as Project Y gives constant returns regarless of the scenario so it is less uncertain & Project X is more variable as it has chance of returns as high as $1000.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.