CFAI book coporate finance question

1.Consider the two projects below. The CFs as well as the NPV and IRR for the two projects are given. For both projects, the requried rate of return is 10%. 0 1 2 3 4 NPV IRR project1 -100 36 36 36 36 14.12 16.37 project2 -100 0 0 0 175 19.53 15.02 What discount rate would result in the same NPV for both projects? A 0-10 B 10-15.02 C 15.02-16.37 D >16.37 2. Wilson Flannery is concerned that this project has multiple IRRs. YR 0 1 2 3 CFs -50 100 0 -50 How many discount produce a zero NPV for this project? A 1, 0 B 2, 0-32% C 2, 0-62% D2, 0-92% Please help…how to calculate these discount rates?

Okay I am not going to answer these for you. Get the booklet that came with your calculator or check the Schweser section on this subjects. There are numerous examples of how you key them in and the result pops out.

Are you sure it’s that easy? For the 1st question, how can you find out the same NAV by entering the numbers into the calculator? To me, looks like we have to solve the euqation for r: -100+36/(1+r) + 36/(1+r)^2 + 36/(1+r)^3 + 36/(1+r)^4 + 36/(1+r)^4 = -100 + 175/ (1+r)^4 I don’t know if it should be this complicated…is there any easy way to do it? For the 2nd one, how can you get mutiple IRRs by entering the numbers into the calculator? my calculator didn’t bring up anything. I know we can either plug those numbers in the choices into the equation below: -500 + 100/(1+r) -50/(1+r)^3 =0 or solve the equation for r. Any other ways to do those two questions? please give some hints…

  1. CFo 0 CFj 36 CFj 36 CFj 36 CFj -139 compute irr = 13.15%f 2. just plug into the different discount rates into your calculator, see which ones produce an npv close to 0.

First problem - set up a new project as jmuc85 has done above with the diffs of the cash flows for each indiv. project given and calculate its IRR. 2nd problem - plug and chug the 4 choices provided. do not try to calculate IRR using your calculator.

Got it…hey cpk123 and jmuc85, thanks a lot for your help! You guys are good!

A lot of times I try to slove the questions before looking at the choices…guess that is a wrong strategy…

fkcfa that would be a completely wrong strategy to follow on this exam. Sometimes you might end up calculating a whole lot of stuff that might not even have been necessary. Read the question before you start out on any analysis. Time is not an issue on the exam, contrary to what many others would have said.