Introduction to Corporate Finance

Ross et al.: Fundamentals

of Corporate Finance, Sixth

Edition, Alternate Edition

IV. Capital Budgeting 9. Net Present Value and

Other Investment Criteria

(^336) © The McGraw−Hill
Companies, 2002

8. Calculating NPV For the cash flows in the previous problem, suppose the
   firm uses the NPV decision rule. At a required return of 11 percent, should the
   firm accept this project? What if the required return was 21 percent?


9. Calculating NPV and IRR A project that provides annual cash flows of
   $1,200 for nine years costs $6,000 today. Is this a good project if the required re-
   turn is 8 percent? What if it’s 24 percent? At what discount rate would you be in-
   different between accepting the project and rejecting it?


10. Calculating IRR What is the IRR of the following set of cash flows?


11. Calculating NPV For the cash flows in the previous problem, what is the
    NPV at a discount rate of zero percent? What if the discount rate is 10 percent?
    If it is 20 percent? If it is 30 percent?


12. NPV versus IRR Bumble’s Bees, Inc., has identified the following two mutu-
    ally exclusive projects:

a.What is the IRR for each of these projects? If you apply the IRR decision

rule, which project should the company accept? Is this decision necessarily

correct?

b.If the required return is 11 percent, what is the NPV for each of these proj-

ects? Which project will you choose if you apply the NPV decision rule?

c. Over what range of discount rates would you choose Project A? Project B?

At what discount rate would you be indifferent between these two projects?

Explain.

13. NPV versus IRR Consider the following two mutually exclusive projects:

Sketch the NPV profiles for X and Y over a range of discount rates from zero to

25 percent. What is the crossover rate for these two projects?

14. Problems with IRR Kong Petroleum, Inc., is trying to evaluate a generation
    project with the following cash flows:

Year Cash Flow (X) Cash Flow (Y)

0 
$4,000 
$4,000

1 2,500 1,500

2 1,500 2,000

3 1,800 2,600

Year Cash Flow (A) Cash Flow (B)

0 
$17,000 
$17,000

1 8,000 2,000

2 7,000 5,000

3 5,000 9,000

4 3,000 9,500

Year Cash Flow

0 
$4,000

1 1,500

2 2,100

3 2,900

306 PART FOUR Capital Budgeting

Basic
(continued)