Question

Q3.Gamma Enterprises, Inc. is considering a project that has the following cash flow and WACC data. What is the project's MIRR?

WACC: 13%

Year: 0 1 2 3 4

Cash flows: -$1,100 $300 $320 $340 $550

Q4.Hogwarts Inc. is considering a project with the following cash flows:       

           Initial cash outlay = $2,500,000

           After-tax net operating cash flows for years 1 to 4 = $779,000 per year

           Additional after-tax terminal cash flow at the end of year 4 = $600,000

Compute the profitability index of this project if Hogwarts' WACC is 11%.

Q5.Anderson Associates is considering two mutually exclusive projects that have the following cash flows:

                       Project A                    Project B

Year                Cash Flow                   Cash Flow

0                   -$10,000                     -$8,000

1                     4,000                       7,000

2                     2,000                         3,000

3                     6,000                         1,000

4                     8,000                         3,000

At what cost of capital do the two projects have the same net present value? (That is, what is the crossover rate?)

Q6.Alpha & Omega wants to invest in a new computer system, and management has narrowed the choice to Systems A and B.

System A requires an up-front cost of $100,000, after which it generates positive after-tax cash flows of $70,000 at the end of each of the next 2 years. The system could be replaced every 2 years, and the cash inflows and outflows would remain the same.

System B also requires an up-front cost of $100,000, after which it would generate positive after-tax cash flows of $48,000 at the end of each of the next 3 years. System B can be replaced every 3 years, but each time the system is replaced, both the cash outflows and cash inflows would increase by 10%.

The company needs a computer system for 6 years, after which the current owners plan to retire and liquidate the firm. The company's cost of capital is 14%. What is the NPV (on a 6-year extended basis) of System A?

Answer 1

1-
Year	cash flow
0	-1100
1	300
2	320
3	340
4	550
MIRR =Using MIRR function in MS excel =mirr(cash flow year 0:cash flow year 4,13%,13%	12.72%
2-
Year	cash flow	present value of cash flow = cash flow/(1+r)^n r =13%
0	-2500000	-2500000
1	779000	689380.53
2	779000	610071.27
3	779000	539886.08
4	1379000	845766.53
NPV =sum of present value of cash flow		185104.4
PI =1+(NPV/initial investment	1+(185104.4/2500000)	1.07
3-
Year	cash flow - B	cash flow - A	differential cash flow
0	-8000	-10000	-2000
1	7000	4000	-3000
2	3000	2000	-1000
3	1000	6000	5000
4	3000	8000	5000
cross over rate = Using IRR function in m s Excel	irr( cell reference year 0 differential cash flow: cell reference year 4 differential cash flow)		20.94%
4-
Year	0	1	2	3	4	5	6
cash inflow		70000	70000	70000	70000	70000	70000
cash outflow	-100000	0	-100000		-100000
net cash flow	-100000	70000	-30000	70000	-30000	70000	70000
present value of cash flow = net cash flow/(1+r)^n r = 14%	-100000	61403.509	-23084.02585	47248.00613	-17762.4083	36355.81	31891.05834
Net present value = sum of present value of cash flow	36051.95