2.27 Review Questions: Chapter Two
Review Questions: Chapter Two
1. Assuming a 4% Reinvestment Rate, what is the project’s Modified Internal Rate of Return? (Yes … I know. Another MIRR problem!)
| Initial Cost= $22,545 | ||
| CF1= $7,500 | CF5= $4,750 | |
| CF2= $6,275 | CF6= $4,650 | |
| CF3= $4,000 | CF7= ($2,150) | |
| CF4= $4,850 | CF8 = $0 |
2. In this chapter, we observed a problem in which one or another project was favored – on the basis of its NPV, depending on whether discount rates were “low or high.” In you own words and in writing, restate the problem, and discuss how it was resolved in detail.
3. How is it possible, if at all, that the IRR says accept two projects, while the MIRR says accept only one of the two? Aren’t IRR and MIRR supposed to be consistent with one another?
4. How does the Spot Curve resolve the issue, if it indeed does at all, of probable multiple future rates?
5. In detail, explain how a firm’s Limited Capital may direct it to accept projects that it might not rank as highly as others – as opposed to the situation where capital were not at issue.
6. Given the following, calculate the Replacement Chain Net Present Value and Annual Annuity Equivalent for each project. You may assume Replication. Use 2% as the Discount Rate. Which project will you favor?
| Project A | Project B |
| Initial Cost = $22,545 | Initial Cost = $1,254 |
| CF1 = $7,500 | CF1= $8,750 |
| CF2= $6,275 | CF2= $7,650 |
| CF3= $4,000 | CF2= $7,650 |
| CF4= 4,850 | CF3= ($120) |
| CF5= $4,250 | CF4 = $0000 |
| CF6= $4,000 | |
| CF7= $0000 |
7. Do you think that Scale is an issue in the prior question?
8. You are given the following observed annual Market Yields. Calculate the Spot Curve.
| YTM1 = 0.0100 |
| YTM2 = 0.0150 |
| YTM3 = 0.0200 |
| YTM4 = 0.0225 |
| YTM5 = 0.0300 |
| YTM6 = 0.0310 |