Question

Questions all relate to the following information:

YEAR	PROJECT A	PROJECT B
t=0	-$1,000,000	-$1,350,000
t=1	$350,000	$470,000
t=2	$400,000	$550,000
t=3	$320,000	$450,000
t=4	$40,000	$60,000
t=5	$550,000	$550,000

6)   Although flawed, the IRR is widely used. Which of the following is the best explanation for that phenomenon?

A.   It is easy to calculate.

B.    People like to compare percentages.

C.   It is less flawed than the alternative, i.e. the NPV.

D.   One still arrives at profitable investment decisions, just not at the most profitable investment decisions.

E.    Both A and D are correct.

7)   Hindelang Inc. is considering a project that has the following cash flow and WACC data. What is the project's MIRR?

WACC:	12.50%
Year	0	1	2	3	4
Cash flows	-$850	$300	$320	$340	$360

a.	15.00%
b.	12.83%
c.	16.67%
d.	13.33%
e.	20.66%

8)There are analysts who believe that when using the MIRR one should use the T-bill rate as the discount/compound rate. This

A.   makes no sense at all.

B.    would lead to higher IRRs.

C.   would result in a more conservative (risk-averse) approach to investing.

D.   only makes sense for companies dealing with government projects.

E.    would have no impact investment decisions.

9)   The so-called “Reinvestment Rate Problem” leads to

A.    the use of the MIRR.

B.     an overstatement of the return using the IRR.

C.    a lower NPV.

D.    two or more IRRs.

E.  choosing low risk/low return investments.

10) The MIRR is a better and more accurate financial tool than the NPV.

True/False

Answer 1

6) IRR is still widely used because of its reporting simplicity. Hence Option A is the answer that IRR is easy to calculate,

7) Terminal Value of Cash Inflow = 300/1.125^3 + 320/1.125^2 +340/1.125+360 = 210.67+252+302.22+360=1124.89 PV of cash outflow = 850/1.125^0 = 850; Hence MIRR = 1.32^0.25 - 1 =.0718 = 7.18%

8) Using T Bill rate will lead to a more conservative risk averse way of investing. Hence option C is the correct answer.

9) In the MIRR the Reinvestment rate is assumed at the cost of capital whereas in the IRR method the reinvestment rate is the IRR rate only. IRR had only the single discount rate. Hence the Reinvestment rate problem lead to the use of MIRR. Thus, option A is the answer.

10) Yes, the MIRR is a better and more accurate financial tool than the NPV. The MIRR is more realistic in approach whereas NPV shows increased potential of projects.

So the above discussed statement in Problem 10) is TRUE.