61.Last month, Lloyd’s Systems analyzed the project whose cash flows are shown below. However, before the decision to accept or reject the project, the Federal Reserve took actions that changed interest rates and therefore the firm’s WACC. The Fed’s action did not affect the forecasted cash flows. By how much did the change in the WACC affect the project’s forecasted NPV? Note that a project’s projected NPV can be negative, in which case it should be rejected.

Old WACC:

10.00%

New WACC:

12.50%

Year

0

1

2

3

Cash flows

-$1,000

$410

$410

$410

62.Lasik Vision Inc. recently analyzed the project whose cash flows are shown below. However, before Lasik decided to accept or reject the project, the Federal Reserve took actions that changed interest rates and therefore the firm’s WACC. The Fed’s action did not affect the forecasted cash flows. By how much did the change in the WACC affect the project’s forecasted NPV? Note that a project’s projected NPV can be negative, in which case it should be rejected.

Old WACC:

8.00%

New WACC:

8.50%

Year

0

1

2

3

Cash flows

-$1,000

$410

$410

$410

63.Ehrmann Data Systems is considering a project that has the following cash flow and WACC data. What is the project’s MIRR? Note that a project’s projected MIRR can be less than the WACC (and even negative), in which case it will be rejected.

WACC:

8.75%

Year

0

1

2

3

Cash flows

-$1,000

$450

$450

$450

64.Ingram Electric Products is considering a project that has the following cash flow and WACC data. What is the project’s MIRR? Note that a project’s projected MIRR can be less than the WACC (and even negative), in which case it will be rejected.

WACC:

14.75%

Year

0

1

2

3

Cash flows

-$800

$350

$350

$350

65.Malholtra Inc. is considering a project that has the following cash flow and WACC data. What is the project’s MIRR? Note that a project’s projected MIRR can be less than the WACC (and even negative), in which case it will be rejected.

WACC:

10.00%

Year

0

1

2

3

4

Cash flows

-$1,175

$300

$320

$340

$360

66.Hindelang Inc. is considering a project that has the following cash flow and WACC data. What is the project’s MIRR? Note that a project’s projected MIRR can be less than the WACC (and even negative), in which case it will be rejected.

WACC:

13.25%

Year

0

1

2

3

4

Cash flows

-$850

$300

$320

$340

$360

67.Stern Associates is considering a project that has the following cash flow data. What is the project’s payback?

Year

0

1

2

3

4

5

Cash flows

-$750

$300

$310

$320

$330

$340

68.Fernando Designs is considering a project that has the following cash flow and WACC data. What is the project’s discounted payback?

WACC:

10.00%

Year

0

1

2

3

Cash flows

-$950

$500

$500

$500

69.Masulis Inc. is considering a project that has the following cash flow and WACC data. What is the project’s discounted payback?

WACC:

10.00%

Year

0

1

2

3

4

Cash flows

-$700

$525

$485

$445

$405

70.Tesar Chemicals is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO believes the IRR is the best selection criterion, while the CFO advocates the NPV. If the decision is made by choosing the project with the higher IRR rather than the one with the higher NPV, how much, if any, value will be forgone, i.e., what’s the chosen NPV versus the maximum possible NPV? Note that (1) “true value” is measured by NPV, and (2) under some conditions the choice of IRR vs. NPV will have no effect on the value gained or lost.

WACC:

6.75%

0

1

2

3

4

CFS -$1,100

$550

$600

$100

$100

CFL

-$2,700

$650

$725

$800

$1,400

71.A firm is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO wants to use the IRR criterion, while the CFO favors the NPV method. You were hired to advise the firm on the best procedure. If the wrong decision criterion is used, how much potential value would the firm lose?

WACC:

7.75%

0

1

2

3

4

CFS -$1,025

$380

$380

$380

$380

CFL

-$2,150

$765

$765

$765

$765

72.Sexton Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher IRR, how much value will be forgone? Note that under certain conditions choosing projects on the basis of the IRR will not cause any value to be lost because the one with the higher IRR will also have the higher NPV, so no value will be lost if the IRR method is used.

WACC:

15.25%

0

1

2

3

4

CFS -$2,050

$750

$760

$770

$780

CFL

-$4,300

$1,500

$1,518

$1,536

$1,554

73.Moerdyk& Co. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher IRR, how much value will be forgone? Note that under certain conditions choosing projects on the basis of the IRR will not cause any value to be lost because the one with the higher IRR will also have the higher NPV, i.e., no conflict will exist.

WACC:

11.50%

0

1

2

3

4

CFS -$1,025

$650

$450

$250

$50

CFL

-$1,025

$100

$300

$500

$700