Question

1.Which of the following is not an advantage of MIRR compared to IRR?

A. Assumes reinvestment of cash flows at WACC

B. Assumes reinvestment of cash flows at IRR

C. Avoids multiple IRR issue

D. None of the above

2.What’s the crossover rate of the following two cash flow series? Year 0 1 2 3 Project X -$1,150 $1000 $300 $400 Project Y -$1,150 $500 $300 $1000

A. 12%

B. 11%

C. 10.3%

D. 9.5%

E. None of the above

3. Which of the following is the criterion to evaluate mutually exclusive projects using NPV decision rule?

A. If NPV>0, accept the project

B. If NPV<0, accept the project A. Select the project with the highest positive NPV B. Select the project with the highest negative NPV C. None of the above ><0.Accept the project

A. Select the project with the highest positive NPV

B. Select the project with the highest negative NPV

C. None of the above

4. Which of the following is the criterion to evaluate independent project using IRR decision rule?

A. If IRR>WACC, accept the project

B. If IRR<WACC.

C. Select the project with the highest IRR

D. Select the project with the highest WACC

E. None of the above

5. You are using a net present value profile to compare Projects A and B, which are mutually exclusive. Which one of the following statements correctly applies to the crossover point between these two?

A. The internal rate of return for Project A equals that of Project B, but generally does not equal zero.

B. The internal rate of return of each project is equal to zero.

C. The net present value of each project is equal to zero.

D. The net present value of Project A equals that of Project B, but generally does not equal zero. E. The net present value of each project is equal to the respective project's initial cost.

6. USA Manufacturing issued 30-year, 7.5 percent semiannual bonds 6 years ago. The bonds currently sell at 101 percent of face value. What is the firm's aftertax cost of debt if the tax rate is 35 percent?

A. 4.82 percent

B. 5.62 percent

C. 3.76 percent

D. 3.59 percent

E. 4.40 percent

7. Financing expense is a relevant cash flow

. A. True B. False

Answer 1

Answer 1: Assumption of Reinvestment of Cash Flows at IRR and avoids multiple IRR issue are not an advantage of MIRR as compared to IRR. MIRR considers the assumption of reinvestment of Cash flow at WACC and there is only one MIRR for a project.

Answer 2: Crossover Rate = r = is the rate of return at which NPV of X project = NPV of Y Project. Calculate the NPV of both Project and equate to each other and will get Crossover Rate.

NPV of X project = 1000/(1+r) + 300/(1+r)^2 + 400/(1+r)^3 - 1150

NPV of Y project = 500/(1+r) + 300/(1+r)^2 + 1000/(1+r)^3 - 1150

NPV of X project =NPV of Y project

1000/(1+r) + 300/(1+r)^2 + 400/(1+r)^3 - 1150= 500/(1+r) + 300/(1+r)^2 + 1000/(1+r)^3 - 1150

By clecking each of options in the given option, to save time,

Crossover Rate = 9.5%

Answer 3: If NPV>0, accept the project

Answer 4: If IRR<WACC

Answer 5:The net present value of each project is equal to zero.

Answer 6: 5.62%

Answer 7: True. Relevant cash flow is defined as cash flow that occur in future and are increental in natue. Financing expence occur in future and it is accordance with the project, that is why it is relevant cash flow.