Question

8. Newington Co. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher MIRR rather than the one with the higher NPV, how much value will be forgone? Note that under some conditions choosing projects on the basis of the MIRR will cause $0.00 value to be lost. r: 8.50 % Year CFs CFL a. $42.12 0 1 $375 $725 2 $375 3 $375 $725 -$1,100 -$2,200 $375 $725 $725 b. $46.46 c. $47.87 d. $48.15 e. $49.16 Manchester Films Manchester Films is considering some new equipment whose data are shown below. The equipment has a 3-year tax life and would be fully depreciated by the straight-line method over 3 years, but it would have a positive pre-tax salvage value at the end of Year 3, when the project would be closed down. Also, some new working capital would be required, but it would be recovered at the end of the project's life. Revenues and other operating costs are expected to be constant over the project's 3-year life. 10.0 % $81,000 $10,000 33.333% $77,000 $35,000 $5,000 Project cost of capital (r) Net investment in fixed assets (depreciable basis) Required new working capital Straight-line deprec. rate Sales revenues, each year Operating costs (excl. deprec.), each year Expected pretax salvage value Тах гate 35.0% Provide answers to the following questions about Manchester Films: 9. What is the project's initial investment outlay? a. $77,000 b. $81,000 c. $91,000 d. $100,000 10. What is the project's operating cash flows from Year 1 to Year 3 a. $36,750 b. $37,500 c.$33,450 d. $32,785

what is the project's NPV

Answer 1

MIRR and NPV are calculated using MIRR and NPV functions in Excel.

MIRR of Project S is higher.  

If Project S is chosen, loss in NPV = $174.81 - $128.35 = $46.46.

The answer is (b).

B8 А fx =NPV(8.5%,B3:36)+B2 D E F 1 Year - B C Cash Cash Flow - Flow - -1100 -2200 375 725 375 725 375 725 375 725 12% 11% $128.35 $174.81 7 MIRR 8 NPV

в 1 Year 20 31 4 2 53 64 7 MIRR 8 NPV Cash Flow - S Cash Flow - L -1100 -2200 375 725 375 725 375 725 375 725 =MIRR(B2:36,8.5%,8.5%) =MIRR(C2:06,8.5%,8.5%) =NPV(8.5%,B3:36) +B2 =NPV(8.5%,C3:C6)+C2