FIN 302 Midterm: Exam2 SG

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erinant18

3 May 2016

School

University of Miami

Department

Finance Business Administration

Course

FIN 302

Professor

Peterson Rodger

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Document Summary

Cf0 = initial cash flow (year 0) ent. C01 = operating cash flows (cash flow at period 1) ent. F01 = frequency of cash flow 1 (how many payments) ent. I interest on on npv or required rate of return (enter in % form, not decimal) Irr of a stream of cash flows (perpetuities) Non-conventional projects- cash flow sign change more than once. Mutually exclusive projects- problem of highest rate vs. most value (& capital rationing) Whenever there is a conflict between npv & any other decision rule (irr, payback. Capital investment (n, i/y, pv, pmt, fv): use when forecasting future cash flows, only incremental cash flows are relevant for making capital investment decisions. Cash flows that arise solely as a result of making the investment. Definition: the difference in the firm"s cash flow with & without the project. Sunk costs are not incremental (a cost that has already been incurred and can"t be reversed)

Related Questions

Understanding the NPV Profile

1. If an independent project with conventional, or normal cash flows is being analyzed, the net present value (NPV) & internal rate of return (IRR) methods _______ agree.

A. Always

B. Never

C. Sometime

Projects W & X are mutually exclusive projects. Their cash flows & NPV profiles are shown as follows:

Year	Project W	Project X
0	$-1,500	$-1,500
1	$200	$900
2	$350	$600
3	$600	$300
4	$1000	$200

2. If the required rate of return for each project is 2%, do the NPV & IRR methods agree or conflict?

A. The methods agree

B. The methods conflict

A Key to resolving this conflict is the assumed reinvestment rate.

3. The NPV calculation implicitly assumes that intermediate cash flows are reinvested at the?

A. Modified rate of return (MIRR)

B. Required rate of return

C. Internal rate of return (IRR)

4. The IRR calculation assumes that the rate at which cash flows can be reinvested is the?

A. Modified rate of return (MIRR)

B. Required rate of return

C. Internal rate of return (IRR)

5. As a result, when evaluating mutually exclusives projects, the ________ is usually the better decision criterion.

A. IRR method

B. NPV method

If projects are mutually exclusive, only one project can be chosen. The internal rate of return (IRR) and the net present value (NPV) methods will not always choose the same project. If the crossover rate on the NPV profile is below the horizontal axis, the methods will _____________ agree.

Projects Y and Z are mutually exclusive projects. Their cash flows and NPV profiles are shown as follows

Year	Project Y	Project Z
0	-1,500	-1,500
1	200	900
2	400	600
3	600	300
4	1000	200

If the weighted average cost of capital (WACC) for each project is 10%, do the NPV and IRR methods agree or conflict?

a. The methods conflict.

b. The methods agree

A key to resolving this conflict is the assumed reinvestment rate. The NPV calculation implicitly assumes that intermediate cash flows are reinvested at the assumes that the rate at which cash flows can be reinvested is the, and the IRR calculation. As a result, when evaluating mutually exclusive projects, the________ is usually the better decision criterion.

apricotmouse341

The YayForSummerBreak Company wants to calculate the net present value (NPV) and internal rate of return (IRR) on the following project:
Cost is $26,000 today, with end-of-year cash flows of $12,000, $10,000, and $7,500, Years 1 through 3 respectively for three years. Assume the cost of capital is 8%. SHOW ALL WORK on the *******TI BAII Plus Calculator****** FOR FULL CREDIT using the Cash Flow (CF) register.
a) (10 pts) NPV? b) (5 pts) IRR? c) (4 pts) Should the project be accepted or rejected, and why?

olivemoose113

FIN 302 Midterm: Exam2 SG

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