Suppose Your Firm Is Considering Investing in a Project with the Cash

question 57

Multiple Choice

Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 10 percent, and that the maximum allowable payback and discounted payback statistics for the project are three and a half and four and a half years, respectively. Use the MIRR decision to evaluate this project; should it be accepted or rejected?
$$\begin{array} { l c c c c c c c c } \text { Time } & 0 & 1 & 2 & 3 & 4 & 5 & 6 \\\text { Cash Flow } & - \$ 85,000 & \$ 12,000 & \$ 11,000 & \$ 13,000 & \$ 21,000 & \$ 31,000 & \$ 32,000\end{array}$$

• A) MIRR = 11.59 percent, accept the project
• B) MIRR = 9.21 percent, reject the project
• C) MIRR = 7.19 percent, reject the project
• D) MIRR = 10.58 percent, accept the project

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Definitions:

Warrants

Financial derivatives that give the holder the right, but not the obligation, to buy or sell a security at a specified price before a certain date.

Employee Options

A form of employee benefit that gives employees the right to purchase company stock at a set price at a future date.

Debt Options

Financial instruments giving the holder the right, but not the obligation, to deal with debt under specified conditions.

Calls

Options contracts giving the holder the right, but not the obligation, to buy a specified amount of an underlying asset at a specified price within a specified time.