A, Anderson Systems is considering a project that has the following cash flow and WACC data.

(1) What is the project's NPV? Note that if a project's expected NPV is negative, it should be rejected.

WACC: 9.00%

Year 0 1 2 3

Cash flows -$1,000 $500 $500 $500

(2) What is the project's IRR?

(3) What is the project's Payback Period?

(4) What is the project's Discounted Payback Period?

B. Tuttle Enterprises is considering a project that has the following cash flow and WACC data.

(1) What is the project's NPV? Note that if a project's expected NPV is negative, it should be rejected.

WACC: 11.00%

Year 0 1 2 3 4

Cash flows -$1,000 $350 $350 $350 $350

(2) What is the project's IRR?

(3) What is the project's Payback Period?

(4) What is the project's Discounted Payback Period?

Homework 1. The internal rate of return is that discount rate that equates the present value of the cash outflows (or costs) with the present value of the cash inflows. a. True b. False 2. A project's IRR is independent of the firm's cost of capital. In other words, a project's IRR doesn't change with a change in the firm's cost of capital. a. True b. False 3. Under certain conditions, a project may have more than one IRR. One such condition is when, in addition to the initial investment at time = 0, a negative cash flow (or cost) occurs at the end of the project's life. a. True b. False 4. The NPV method is based on the assumption that projects' cash flows are reinvested at the project's risk-adjusted cost of capital. a. True b. False 5. The IRR method is based on the assumption that projects' cash flows are reinvested at the project's risk-adjusted cost of capital. a. True b. False 6. Four of the following statements are truly disadvantages of the regular payback method, but one is not a disadvantage of this method. Which one is NOT a disadvantage of the payback method? a. b. c. d. e. 7. Lacks an objective, market-determined benchmark for making decisions. Ignores cash flows beyond the payback period. Does not directly account for the time value of money. Does not provide any indication regarding a project's liquidity or risk. Does not take account of differences in size among projects. Which of the following statements is CORRECT? a. If a project with normal cash flows has an IRR greater than the WACC, the project must also have a positive NPV. b. If Project A's IRR exceeds Project B's, then A must have the higher NPV. c. A project's MIRR can never exceed its IRR. d. If a project with normal cash flows has an IRR less than the WACC, the project must have a positive NPV. e. If the NPV is negative, the IRR must also be negative. 8. Which of the following statements is CORRECT? a. The MIRR and NPV decision criteria can never conflict. b. The IRR method can never be subject to the multiple IRR problem, while the MIRR method can be. c. One reason some people prefer the MIRR to the regular IRR is that the MIRR is based on a generally more reasonable reinvestment rate assumption. d. The higher the WACC, the shorter the discounted payback period. e. The MIRR method assumes that cash flows are reinvested at the crossover rate. 9. Anderson Systems is considering a project that has the following cash flow and WACC data. (1) What is the project's NPV? Note that if a project's expected NPV is negative, it should be rejected. WACC: 9.00% Year Cash flows 0 -$1,000 1 $500 2 $500 3 $500 (2) What is the project's IRR? (3) What is the project's Payback Period? (4) What is the project's Discounted Payback Period? 10. Tuttle Enterprises is considering a project that has the following cash flow and WACC data. (1) What is the project's NPV? Note that if a project's expected NPV is negative, it should be rejected. WACC: 11.00% Year Cash flows 0 -$1,000 1 $350 (2) What is the project's IRR? (3) What is the project's Payback Period? (4) What is the project's Discounted Payback Period? 2 $350 3 $350 4 $350