# Chapter 6 Solutions

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**PROBLEM 11-1**

__NPV Project K costs $52,125, its expected cash inflows are $12,000 per year for 8 years, and its WACC is 12%. What is the project’s NPV?__

**PROBLEM 11-2**

__IRR Refer to Problem 11-1. What is the project’s IRR?__

CF_{0 }= -52,125

CF_{1-8 }= 12,000

**PROBLEM 11-3**

__MIRR Refer to Problem 11-1. What is the project’s MIRR?__

PV Cost = 52,125

n = 8 years

i = 12%

PMT = 12000

**PROBLEM 11-4**

__PAYBACK PERIOD Refer to Problem 11-1. What is the project’s payback?__

Year | CF | Cumulative CF |

**PROBLEM 11-5**

__DISCOUNTED PAYBACK Refer to Problem 11-1. What is the project’s discounted payback?__

**PROBLEM 11-6**

__NPV Your division is considering two projects with the following cash flows (in millions):__

Project A ProjectB

Year 0 -25 -20

Year 1 5 10

Year 2 10 9

Year 3 17 6

**PROBLEM 11-7**

__CAPITAL BUDGETING CRITERIA A firm with a 14% WACC is evaluating two projects for this year’s capital budget. After-tax cash flows, including depreciation, are as follows:__

Project A ProjectB

Year 0 -6000 -18000

Year 1 2000 5600

Year2 2000 5600

Year 3 2000 5600

Year 4 2000 5600

Year 5 2000 5600

**Problem11-8**

__CAPITAL BUDGETING CRITERIA: ETHICAL CONSIDERATIONS A mining company is con-sidering a new project. Because the mine has received a permit, the project would be legal; but it would cause significant harm to a nearby river. The firm could spend an additional $10 million at Year 0 to mitigate the environmental problem, but it would not be required to do so. Developing the mine (without mitigation) would cost $60 million, and the expected cash inflows would be $20 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $21 million. The risk-adjusted WACC is 12%.__

__PROBLEM 11-9__

__CAPITAL BUDGETING CRITERIA: ETHICAL CONSIDERATIONS An electric utility is consid-ering a new power plant in northern Arizona. Power from the plant would be sold in the Phoenix area, where it is badly needed. Because the firm has received a permit, the plant would be legal; but it would cause some air pollution. The company could spend an additional $40 million at Year 0 to mitigate the environmental problem, but it would not be required to do so. The plant without mitigation would cost $240 million, and the expected cash inflows would be $80 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $84 million. Unemployment in the area where the plant would be built is high, and the plant would provide about 350 good jobs. The risk-adjusted WACC is 17%.__

__Problem 11-10__

__CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE PROJECTS A firm with a WACC of 10% is considering the following mutually exclusive projects:__

__Years ProjectA ProjectB__

__0 -$400 -$600__

__1 $55 $300__

__2 $55 $300__

__3 $55 $50__

__4 $225 $50__

__5 $225 $49__

__Which project would you recommend? Explain.__