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# 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?

CF0 = -52,125

CF1-8 = 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.

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