CH 11a Miami Project Evaluation Applying NPV Decision Rule Questions

Important General Instructions for Reporting Numerical Answers:

– Do not round intermediate calculations.

– Report your answers to the number of decimal places requested.

– Unless otherwise instructed, solve problems in the given units. IE: if given units are in $K, complete your computations in these units and, as applicable, report your answer in these units (without writing “$” or “K”).

– Do not report any numerical answer as a percent. IE: for example, write

0.324 instead of 32.4%.

– Report negative numbers with a leading minus sign, like this (for example):

-23.451

Not like this: (23.451).

– Note that Canvas removes trailing insignificant figures. If you type, for example, 41.350, Canvas will remove the last decimal place and record your answer as 41.35 This is fine because 41.35 = 41.350.

– Assume time is measured in years unless otherwise stated.

Before starting this assignment, you are welcome to watch the

“Practice Problems for HW11a” video, located here:

and at youtube.com/appliedfinancemodels in the FIN 301 playlist.

Q1:

A firm evaluates all of its projects by applying the NPV decision rule. A project under consideration has the following cash flows:

Year	Cash Flow
0	-24,000
1	15,000
2	-5,000
3	25,000

What is the NPV of the project if the opportunity cost of capital is 11 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Q2:

A firm evaluates all of its projects by applying the NPV decision rule. A project under consideration has the following cash flows:

Year	Cash Flow
0	$	-34,000
1		15,000
2		17,000
3		13,000

If the NPV = $1.27, should the firm accept this project?

A. Yes

B. No

Q3:

If the NPV of the above project is as stated above, how much value does it add to the firm, compared to investing in an Opportunity Cost Investment project?

A. This cannot be determined without knowing the opportunity cost of capital

B. $2.54
C. $1.27

Q4:

A firm evaluates all of its projects by applying the NPV decision rule. A project under consideration has the following cash flows:

Year	Cash Flow
0	$	-34,000
1		15,000
2		17,000
3		13,000

What is the NPV of the project if the opportunity cost of capital is 24 percent? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Q5:

A firm evaluates all of its projects by applying the NPV decision rule. A project under consideration has the following cash flows:

Year	Cash Flow
0	$	-34,000
1		15,000
2		17,000
3		13,000

If the NPV of the project is -$5.44, should the firm accept this project?

B) No
A) Yes

Q6:

Consider these cash flows:

Year	Cash Flow
0	$	-16,700
1		9,700
2		7,800
3		4,300

What is the BCR (profitability index) for the set of cash flows if rocc is 10 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Q7:

If the profitability index (or BCR) for this set of cash flows is 0.92, is this a good investment from the DCF modeling perspective? Choose Yes, No or Not Sure, then provide a reason for your answer.

Year	Cash Flow
0	$	-16,700
1		9,700
2		7,800
3		4,300

A. We can’t answer this question without knowing rocc.
B. Not sure
C. The BCR is a small fraction of the project’s positive cash flows.
D. The BCR rule is to accept projects with BCR values less than 1.
E. No
F. The BCR rule is to reject projects with BCR values less than 1.
G. Yes

Q8:

Which is the correct equation to use as a starting point for finding the IRR of a project with these cash flows:

Year	Cash Flow
0	$	-15,400
1		7,300
2		9,100
3		5,900

A. 0 = NPV * 7300/(1+IRR) + 9100/(1+IRR)^2 + 5900/(1+IRR)^3
B. None of the equations are helpful in finding the IRR
C. 0 =-15400 + 7300/(1+IRR) + 9100/(1+IRR)^2 + 5900/(1+IRR)^3
D. 0 = (-15400 + 7300 + 9100 + 5900)/(1+IRR)^3
E. IRR =-15400 + 7300/(1+rocc) + 9100/(1+rocc)^2 + 5900/(1+rocc)^3

Q9:

Which answer is closest to the IRR of the following set of cash flows? Hint: You can use: a) trial and error, b) Excel, or c) a financial calculator to solve this problem.

Year	Cash Flow
0	-15,400
1	7,000
2	9,000
3	6,000

A. 20.7%
B. 12.4%
C. 28.7%
D. 6.2%
E. This question cannot be answered without knowing the rocc for this project
F. -3.2%
G. 15.6%

Q10:

What is the IRR for this project? (Do not round intermediate calculations and do not enter your answer as a percent. Round your answer to 3 decimal places, e.g., 0.315 instead of 31.5%.)

EOY	Cash Flow
0		-10,000
3		13,000

Q11:

At what rocc would you be on the knife-edge between accepting or rejecting the above project? (Do not round intermediate calculations and do not enter your answer as a percent. Round your answer to 3 decimal places, e.g., 0.315 instead of 31.5%).

Q12:

A firm evaluates all of its projects by applying the IRR rule. A project under consideration has an IRR of 20%, and an rocc of 21%. The risk-free rate rrf is 12%. Should the firm go ahead with this project? (Assume its OK to use the IRR rule). Choose yes, no or not sure, then also choose one answer providing your reasoning.

A. The IRR rule says to accept projects with IRR > rrf.
B. Yes
C. The IRR rule says to accept only projects with IRR > rocc.
D. The IRR rule says to reject only projects with IRR > rocc.
E. We can’t compare the BCR to the IRR.
F. The IRR rule says to reject projects with IRR > rrf.
G. No
H. We can’t compare the NPV to the IRR.
I. Not sure

Q13:

A project that provides annual positive cash flows of $12000 for nine years costs $63,000 today. The first positive CF will be received one year from now.

What is the NPV for the project if the rocc is 10.5 percent? Hint: you can do this problem by hand, but its quicker to solve in Excel. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)