Practice
Problems – Chapter 5
1.
Choose among these mutually exclusive projects using IRR alone. The
required return for each project is 12%.
C0
C1
C2
Project A
-100,000 65,000 52,000
Project B
-99,200 67,400 50,600
Project C
-50,000 32,000 31,000
2.
The cash flows and IRR's for four projects are described below:
C0
C1
C2
Project A
-250,000 149,000 136,000
Project B
-200,000
120,000 125,600
Project C
-300,000 150,000 250,000
Project D
-480,000 370,000 220,000
a)
Compute the IRR for each project.
b)
A and B are mutually exclusive projects. Using only IRR (i.e., without computing
NPV), choose which project should be taken if the required return for both
projects is 8%.
c)
C and D are mutually exclusive projects. Using only IRR, choose which project
should be taken if the required return for both projects is 17%.
d)
How would your answer to part c change if the required return was 10%?
3. Choosing
between two mutually exclusive projects using IRR alone, you obtain the
following incremental cashflows. If the required return is 13%, which
project should you pick?
C0
C1
C2
A - B -50,000 29,000
10,400
4. Choosing
between two mutually exclusive projects using IRR alone, you obtain the
following incremental cashflows. If the required return is 13%, which
project should you pick?
Project C0 C1 C2
A - B
4,000 -
8,500 4,000
5.
A, B and C are three mutually exclusive projects:
C0
C1
C2
IRR
Project A
-25,000 15,150 15,150
13.83%
Project B
-20,000
3,300 22,150
13.81%
Project C -10,000
5,750
5,750
9.8%
a)
Using IRR alone, judge which project should be chosen if the required
return for all three projects is 11%.
b)
How will your decision change if the required return was 13%?
6.
The cash flows and IRR's for three mutually exclusive projects are given
below:
C0
C1
C2
Project A
-240,000 218,000 62,704
Project B
-180,000
80,000 142,000
Project C
-250,000 145,000 145,000
Using
IRR alone, choose which project should be accepted, if any,
a)
if the required return is 10%?
b)
if the required return is 20%?
7.
Choose among the following mutually exclusive projects using IRR alone.
The required return for both projects is 15%.
Project
C0
C1
C2
IRR
A
-10,200
10,310
2,740
22.93%
B
-5,200
-1,940
10,240
22.91%
A - B
-5,000 12,250
-7,500
8.
The White Rabbit Co. has retained Red Queen Consultants to advise then
whether to undertake the following project to manufacture looking glasses.
The only investment criterion Red Queen Consultants knows about is IRR.
What will they advise if the required return for the project is 4%?
C0
C1
C2
+4,000
-2,000
-2,310
9.
Which of these projects would you pick, if you are given a capital budget
of $60?
Investment
PV
NPV
P.I. = NPV/Inv
A
30
39
9
0.3
B
20
28
8
0.4
C
10
16
6
0.6
D
15
20
5
0.33
E
5
7.5
2.5
0.5
(Note: this is the same example we did in class with a budget
of $50.)
10. Investment PV NPV
P
55
85
28
Q
35
60
25
R
45
65
20
S
20
35
15
T
20
30
10
a) Which projects would you pick if you have a capital budget
of $110?
b) Which projects would you
pick if the capital budget is $125 instead?
11.
Capone Extermination has the following projects available:
PROJECT
INVESTMENT
NPV
A
250
45
B
200
40
C
180
31.5
D 155
36
E
300
45
F
195
33
a) If the firm has a budget of $785 for capital expenditure, which projects should it select?
b) How will your answer change if the budget is $800?