1. What are the problems with the IRR as a method for determining whether a project is viable? Note you need to address all the reasons that the IRR might have a problem in the capital budgeting process.

2. You have been asked to determine whether the following project is to be taken by your company. The cost of the project is to be incurred over two years. The cash outflow in year 0 will be $160,000 and in year two $190,000. The first positive cash flow will be in years 3 and will be $80,000 after that the cash flows will be $120,000 in year 4; 200,000 in year 5; $300,000 in year 6; and $50,000 in year 7. Calculate the NPV, IRR, Payback period, MIRR, and the Profitability Index of the project. Determine if the project should be taken if the required rate of return is 12.00% and the cutoff payback period is 2.5 years?

3. The following are two projects that your company is considering. Your firm’s WACC is 10% and the projects are mutually exclusive. Which project should your firm take? Use both methods for the project of unequal lives

Year Project A (4yearLife) Project B (eight year Life)
0 -50,000 -120,000
1 10,000 20,000
2 10,000 20,000
3 20,000 14,000
4 30,000 30,000
5 0 20,000
6 0 20,000
7 0 35,000
8 0 30,000

4. The following is a project your firm is considering.
The cost of the project is $1,200,000, which will be an immediate expense. The project is expected to produce cash flows in year 3 (end of Year) of $400,000 and this cash flow will grow at 15% for the following 5 years. At the end of the 6th year, a cash outflow of 500,000 is expected (the cost of ending the project). Calculate the NPV of the project, IRR, and MIRR if the required rate of return is 7.00%. Should your firm take the project?

5. What is the meaning of the NPV? What is the NPV of the stock of a company? What is the NPV of the bonds of the company? Explain your answers?

6. The PMBA Corp (beta = 1.3) is trying to determine its cost of equity. You have been asked to give the cost of equity using a variety of methods. The methods to be used are the CAPM and the DCF model. The risk-free rate is 2.00%, and the risk premium on the market is 5.50%. The stock is expected to pay a dividend of $3.00 next year, the stock is trading at $100 per share, the return on equity is 12% and the retention ratio is 80%. You have been told the return for the Small sized portfolio minus the bid-sized portfolio is 3.00%, and the slope coefficient is .3, the high book to market portfolio minus the low book to market value portfolio is -2.00% and the factor weighting (slope) is .4. Calculate the three costs on equity. Explain the difference in the results.

1. What are the problems with the IRR as a method for determining w...