FIN 534 Week 8 Homework Set 4 Solution

FIN 534 Week 8 Homework Set 4 Solution

FIN 534 Week 8 Homework Set 4 Solution

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FIN 534 – Homework Set #4



Directions: Answer the following questions on a separate document. Explain how you reached the answer or show your work if a mathematical calculation is needed, or both. Submit your assignment using the assignment link in the course shell. This homework assignment is worth 100 points.



Use the following information for Questions 1 through 5:



Assume you are presented with the following mutually exclusive investments whose expected net cash flows are as follows:


EXPECTED NET CASH FLOWS:
Year Project A Project B
0 −$400 −$650
1 −528 210
2 −219 210
3 −150 210
4 1,100 210
5 820 210
6 990 210
7 −325 210





1. Construct NPV profiles for Projects A and B.

2. What is each project’s IRR?

3. If each project’s cost of capital were 10%, which project, if either, should be selected? If the cost of capital were 17%, what would be the proper choice?

4. What is each project’s MIRR at the cost of capital of 10%? At 17%? (Hint: Consider Period 7 as the end of Project B’s life.)

5. What is the crossover rate, and what is its significance?

Use the following information for Questions 6 through 8:



The staff of Porter Manufacturing has estimated the following net after-tax cash flows and probabilities for a new manufacturing process:



Line 0 gives the cost of the process, Lines 1 through 5 give operating cash flows, and Line 5* contains the estimated salvage values. Porter’s cost of capital for an average-risk project is 10%.


Net After-Tax Cash Flows
Year P = 0.2 P = 0.6 P = 0.2
0 −$100,000 −$100,000 −$100,000
1 20,000 30,000 40,000
2 20,000 30,000 40,000
3 20,000 30,000 40,000
4 20,000 30,000 40,000
5 20,000 30,000 40,000
5* 0 20,000...

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