**Net Present Value (NPV)**

Problem 11-1

NPV

Project K costs $40,000, its expected cash inflows are $12,000 per year for 6 years, and its WACC is 13%. What is the project's NPV? Round your answer to the nearest cent.

$ __________

11-2: Internal Rate of Return (IRR)

Problem 11-2

IRR

Project K costs $46,145.75, its expected cash inflows are $10,000 per year for 9 years, and its WACC is 9%. What is the project's IRR? Round your answer to two decimal places.

________ %

11-2: Net Present Value (NPV)11-3: Internal Rate of Return (IRR)11-6: Modified Internal Rate of Return (MIRR)11-8: Payback Period

Problem 11-3

Capital budgeting criteria

A firm with a 13% WACC is evaluating two projects for this year's capital budget. After-tax cash flows, including depreciation, are as follows:

0 1 2 3 4 5

Project A -$30,000 $10,000 $10,000 $10,000 $10,000 $10,000

Project B -$90,000 $28,000 $28,000 $28,000 $28,000 $28,000

Calculate MIRR for each project. Round your answers to two decimal places.

Project A ________ %

Project B ________ %

Calculate payback for each project. Round your answers to two decimal places.

Project A

3

years

Project B ________ years

Calculate discounted payback for each project. Round your answers to two decimal places.

Project A ________ years

Project B ________ years

IRR?

The conflict between NPV and IRR occurs due to the difference in the size of the projects.

11-2: Net Present Value (NPV)11-3: Internal Rate of Return (IRR)

Problem 11-4

Capital budgeting criteria: ethical considerations

A mining company is considering a new project. Because the mine has received a permit, the project would be legal; but it would cause significant harm to a nearby river. The firm could spend an additional $9.66 million at Year 0 to mitigate the environmental problem, but it would not be required to do so. Developing the mine (without mitigation) would cost $57 million, and the expected net cash inflows would be $19 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $20 million. The risk adjusted WACC is 10%.

Calculate the NPV and IRR with mitigation. Round your answers to two decimal places. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55.

NPV $ ________ million

Calculate the NPV and IRR without mitigation. Round your answers to two decimal places. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55.

NPV $ ________ million

6.

________________________________________

11-3: Net Present Value (NPV) and Internal Rate of Return (IRR)

**Problem 11-5 **

Capital budgeting criteria: ethical considerations

An electric utility is considering a new power plant in northern Arizona. Power from the plant would be sold in the Phoenix area, where it is badly needed. Because the firm has received a permit, the plant would be legal; but it would cause some air pollution. The company could spend an additional $40 million at Year 0 to mitigate the environmental problem, but it would not be required to do so. The plant without mitigation would cost $270.46 million, and the expected cash inflows would be $90 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $93.41 million. Unemployment in the area where the plant would be built is high, and the plant would provide about 350 good jobs. The risk adjusted WACC is 19%.

Calculate the NPV and IRR with mitigation. Round your answers to two decimal places. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55.

NPV $ ________ million

IRR ________ %

Calculate the NPV and IRR without mitigation. Round your answers to two decimal places. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55.

NPV $ ________ million

IRR ________ %________________________________________

Problem 11-6

IRR and NPV

A company is analyzing two mutually exclusive projects, S and L, with the following cash flows:

0 1 2 3 4

Project S -$1,000 $875.10 $260 $10 $5

Project L -$1,000 $0 $260 $400 $771.81

The company's WACC is 8.0%. What is the IRR of the better project? (Hint: The better project may or may not be the one with the higher IRR.) Round your answer to two decimal places.

________ %

**Problem 11-7**

NPV and IRR

A store has 5 years remaining on its lease in a mall. Rent is $1,900 per month, 60 payments remain, and the next payment is due in 1 month. The mall's owner plans to sell the property in a year and wants rent at that time to be high so that the property will appear more valuable. Therefore, the store has been offered a "great deal" (owner's words) on a new 5-year lease. The new lease calls for no rent for 9 months, then payments of $2,600 per month for the next 51 months. The lease cannot be broken, and the store's WACC is 12% (or 1% per month).

Should the new lease be accepted? (Hint: Be sure to use 1% per month.)

no

If the store owner decided to bargain with the mall's owner over the new lease payment, what new lease payment would make the store owner indifferent between the new and the old leases? (Hint: Find FV of the old lease's original cost at t = 9, then treat this as the PV of a 51-period annuity whose payments represent the rent during months 10 to 60.) Round your answer to the nearest cent.

$ ________

The store owner is not sure of the 12% WACC - it could be higher or lower. At what nominal WACC would the store owner be indifferent between the two leases? (Hint: Calculate the differences between the two payment streams, and then find its IRR.) Round your answer to two decimal places.

________ %

**Problem 11-8 **

Multiple IRRs and MIRR

A mining company is deciding whether to open a strip mine, which costs $1.5 million. Cash inflows of $13 million would occur at the end of Year 1. The land must be returned to its natural state at a cost of $11 million, payable at the end of Year 2.

Plot the project's NPV profile.

Think of some other capital budgeting situations in which negative cash flows during or at the end of the project's life might lead to multiple IRRs. The input in the box below will not be graded, but may be reviewed and considered by your instructor.

blank

What is the project's MIRR at WACC = 10%? Round your answer to two decimal places.

________ %

What is the project's MIRR at WACC = 20%? Round your answer to two decimal places.

________ %

**Problem 11-9 **

NPV

A project has annual cash flows of $6,500 for the next 10 years and then $5,000 each year for the following 10 years. The IRR of this 20-year project is 13.85%. If the firm's WACC is 10%, what is the project's NPV? Round your answer to the nearest cent.

$ ________

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