Solved by a verified expert:Freight is evaluating a proposed capital budgeting project (project Lima) that will require an initial investment of $800,000.Freight has been basing capital budgeting decisions on a project’s NPV; however, its new CEO wants to start using the IRR method for capital budgeting decisions. The CFO says that the IRR is a better method because returns in percentage form are easier to understand and compare to required returns. Fright WACC is 8%, and project Lima has the same risk as the firm’s average project.The project is expected to generate the following net cash flows:YearCash Flow1 $350,0002 $475,0003 $425,0004 $500,0001. Which of the following is the correct calculation of project Lima IRR?a. 32.47%b. 36.29%c. 38.20%d. 34.38%2. If this is an independent project, the IRR method states that the firm shoulda. Accept Project Limab. Reject Project Lima3. If mutually exclusive projects are proposed that both have an IRR greater than the necessary WACC, the IRR method states that the firm should accept:a. The project with the greatest IRR, assuming that both projects have the same risk as the firm’s average projectb. The project with the greater future cash inflows, assuming that both projects have the same risk as the firm’s average projectc. The project that requires the lowest initial investment, assuming that both projects have the same risk as the firm’s average project.d. Crane Co is analyzing the project that requires an initial investment of $3,225,000.The projects’s expected cash flows are:YearCash Flow1 $375,0002 -125,0003 $500,0004 $400,0004. Crane WACC is 8%, and the project has the same risk as the firm’s average project. Calculate this project’s modified internal rate of return (MIRR).a. -19.31%b. 16.99%c. 15.10%d. 17.94%5. If Crane managers select projects based on the MIRR criterion, they should _____ this independent project.a. Acceptb. Reject Suppose you are evaluating a project with the cash inflows shown in the following table. Your boss has asked you to calculate the project’s NPV. You don’t know the project’s initial cost, but you do know th project’s regular payback period is 2.5 years.Year Cash Flow1 $375,0002 $500,0003 $425,0004 $500,0006. If the project’s WACC is 7%, the project’s NPV is which of the followinga. $428,061b. $385,255c. $470,867d. $513,6737. Which of the following statements indicate a disadvantage of using the regular payback period (not the discounted payback period) for capital budgeting decisions? Check all that applya. The payback period does not take the project’s entire life into accountb. The payback period does not take the time value of money into accountc. The payback period is calculated using net income instead of cash flows.8. Companies often use several methods to evaluate the project’s cash flows and each of them has its benefits and disadvantages. Based on your understanding of the capital budgeting evaluation methods, which of the following conclusions about capital budgeting are valid? Check all that apply.a. Managers have been slow to adapt the IRR, because percentage returns are a harder concept for them to grasp.b. The NPV shows how much value the company is creating for its shareholders.c. For most firms, the reinvestment rate assumption in the MIRR is more realistic than the assumption in the IRR.
Recent Comments