Problems
7A-1investing rateof 12% and anexternal borrowing rate
of 6%. Compute and use the MIRR as the project's
rate of return.
Find the rate of return for the following cash flow:
Year Cash Flow
o -$15,000
1 10,000
2 -8,000
3 11,000
4 13,000
(Answer:21.2% IRR)
A group of businessmen formed a partnership to
buy and race an Indianapolis-type racing car. They
agreed to pay an individual $50,000 for the car and
associated equipment. The payment was to be in a
lump sum at the end of the year. In what must have
been "beginner's luck," the group won a major race
the first week and $80,000. The rest of the first year,
however, was not as good: at the end of the first year,
the group had to payout $35,000 for expenses plus
the $50,000 for the car and equipment. The second
year was a poor one: the group had to pay $70,000
just t()clear up the racing debts at the end of the year.
During the third and fourth years, racing income just
equaled costs. When the group was approached by a
prospective buyer for the car, they readily accepted
$80,000 cash, which was paid at the end of the fourth
year. What rate of return did the businessmen obtain
from their racing venture? (Answer:9.6% MIRR)
A student organization, at the beginning of the fall
quarter, purchased and operated a soft-drink vending
machine as a means of helping finance its activities.
The vending machine cost $75 and was installed at
a gasoline station near the university. The student
organization pays $75 every 3 months to the station
owner for the right to keep the vending machine at
the station. During the year the student organiza-
tion owned the machine, they received the follow-
ing quarterly income from it, before making the $75
quarterly payment to the station owner:7A-27A-3
Quarter
Fall
Winter
Spring
SummerIncome
$150
25
125
150At the end of one year, the student group resold the
machine for $50. Determine the quarterly cash flow.7A-47A-57A-67A-77A-87A-9Then determine a quarterlyrate of return, a nominal
annual rate, and an effectiveannual rate.
Given the followingcash flow,determine the rate of
return on the project. (Answer:11.3% MIRR)
Year Cash Flow
o -$500
1 +2000
2 -1200
3 - 300Given the following cash flow, determine the rate of
return on the investment. (Answer: IRR =21.1 %
IRR)
Year Cash Flow
o -$500
1 200
2 -500
3 1200
Given the following cash flow,determinethe rate of
return on the investment.
Year Cash Flow
o -$100
1 360
2 -570
3 360Compute the rate of return on the investment char-
acterizedby the following cash flow.
Year Cash Flow
o -$110
1 -500
2 300
3 -100
4 400
5 500
Compute the rate of return on the investmentchar~
acterizedby the following cash flow.
Year Cash Flow
o -$50.0
1 +20.0
2 -40
3 +36.8
4 +36.8
5 +36.8
(Answer:IRR=15.4%)
A firminvested$15,000in a projectthat appearedto
have excellentpotential.Unfortunately,a lengthyla-
bor dispute in Year3 resulted in costs that exceededr