Basics of Capital Budgeting – Practice problems

(The following information applies to the following four problems.)

Project A has a 10 percent cost of capital and the following cash flows:
Project A
Year Cash Flow
0 -$300
1 100
2 150
3 200
4 50

NPV Answer: d
1. What is Project A’s net present value (NPV)?

a. $ 21.32
b. $ 66.26
c. $ 83.00
d. $ 99.29
e. $112.31

IRR Answer: d
2. What is Project A’s internal rate of return (IRR)?

a. 13.44%
b. 16.16%
c. 18.92%
d. 24.79%
e. 26.54%

MIRR Answer: e
3. What is Project A’s modified internal rate of return (MIRR)?

a. 7.40%
b. 12.15%
c. 14.49%
d. 15.54%
e. 18.15%
 Crossover rate Answer: c
4. In addition to Project A, the firm has a chance to invest in Project B.Project B
has the following cash flows:

Project B
Year Cash Flow
0 -$200
1 150
2 100
3 50
4 50

At what cost of capital would Project A and Project B have the same net
present value (NPV)?

a. 11.19%
b. 12.23%
c. 12.63%
d. 13.03%
e. 13.27%

(The following information applies to the next two problems.)

Company A is considering a project with the following cash flows:

Project
Year Cash Flow
0 -$5,000
1 5,000
2 3,000
3 -1,000
The project has a cost of capital of 10 percent.

NPV Answer: b
5. What is the project’s net present value (NPV)?

a. $1,157
b. $1,273
c. $1,818
d. $2,000
e. $2,776
 MIRR Answer: c
6. What is the project’s modified internal rate of return (MIRR)?

a. 16.6%
b. 17.0%
c. 17.6%
d. 18.0%
e. 18.6%

(The following information applies to the next two problems.)

Company B is considering a project with the following cash flows:
Project
Year Cash Flow
0 - X
1 175
2 175
3 300
Missing cash flow, payback period, and NPV Answer: a
7. Assume that the project has a regular payback period of 2 years and a cost
of capital of 10 percent. What is the project’s net present value (NPV)?

a. $179.11
b. $204.11
c. $229.11
d. $254.11
e. $279.11

Missing cash flow, IRR, and NPV Answer: c

8. Now instead of making an assumption about the payback period, instead assume
that the project has an internal rate of return (IRR) of 15 percent. Given this
assumption, what would be the project’s net present value (NPV) if the WACC
equals 12 percent?

a. $ 0.00
b. $18.08
c. $27.54
d. $37.30
e. $47.36
(The following information applies to the next four problems.)

Bell Corporation is considering two mutually exclusive projects, Project A and Project B.
The projects have the following cash flows:
Project A Project B
Year Cash Flow Cash Flow
0 -500 -500
1 150 300
2 200 300
3 250 350
4 100 -300

Both projects have a 10 percent cost of capital.

NPV Answer: d
9. What is Project A’s net present value (NPV)?

a. 30.12
b. 34.86
c. 46.13
d. 57.78
e. 62.01

IRR Answer: a
10. What is Project A’s internal rate of return (IRR)?

a. 15.32%
b. 15.82%
c. 16.04%
d. 16.68%
e. 17.01%

MIRR Answer: b
11. What is Project B’s modified internal rate of return (MIRR)?

a. 12.05%
b. 12.95%
c. 13.37%
d. 14.01%
e. 14.88%
Crossover rate Answer: c
12. At what discount rate would the two projects have the same net present
value?

a. 4.50%
b. 5.72%
c. 6.36%
d. 7.15%
e. 8.83%