Solve:

1. Two projects are considered both are mutually exclusive and have the following Cash Flow:

	Project A	Project B
Year	Cash Flows	Cash Flows
0	(50,000)	(50,000)
1	15,625	0
2	15,625	0
3	15,625	0
4	15,625	0
5	15,625	99,500

The required rate of return is 10%

Determine: Which Project should be accepted and why?

2. Your company is considering two mutually exclusive projects X and Y whose costs and cash flows are shown below:

	Project X	Project Y
Year	Cash Flows	Cash Flows
0	($2,000)	($2,000)
1	200	2,000
2	600	200
3	800	100
4	1,400	75

Each project is equally risky, and the companys Cost of Capital is 12%. You must make a recommendation based on the MIRR. What is the MIRR of the best project?

3. Taylor Technologies has a capital structure of 40% debt and 60% equity. The equity will be financed with Retained Earnings. The bonds have a yield to maturity of 10%. The companys beta is 1.1, the risk-free rate is 6% and the market risk premium is 5%, and the tax rate is 30%. The company is considering a project with the following cash flows:

	Project X
Year	Cash Flows
0	($50,000)
1	35,000
2	43,000
3	60,000
4	(40,000)

Determine the MIRR of the project.

Answer: What difference would there be between the MIRR and the IRR when analyzing this project?

4. Your company is planning to open a gold mine that will cost $3 million to build, with expenses occurring at the end of the year in three years. The mine will provide cash flows after contributions of $2 million at the end of two successive years, then it will cost $0.5 million to close the mine at the end of the third year of operations.

Determine the NPV and IRR of this project.

Answer: What decision would you make if you were suggested to keep the mine operating after the third year?

5. Davis Corporation faces two separate investment opportunities. The corporation has an investment policy that requires acceptable projects to recoup all costs within 3 years. The corporation uses the Discounted Payback Period Method to evaluate potential projects and uses a discount rate of 10%. The cash flows for the two projects are:

	Project A	Project B
Year	Cash Flows	Cash Flows
0	($80,000)	($80,000)
1	40,000	50,000
2	40,000	20,000
3	40,000	30,000
4	30,000	0

Determine: In which project should the company invest?

Answer: Explain the impact of the method used in the decision making.

6. You are considering purchasing an investment that pays $5,000 per year for years 1 5, $3,000 per year for years 6 8, and $2,000 per year for years 9 and 10. You require a 14% rate of return and cash flows occur at the end of each year.

Determine: How much are you willing to pay for this investment?

Answer: Which method of Capital Budgeting you use for the decision making and why?