Houston Inc

question 15

Multiple Choice

Houston Inc. is considering a project which involves building a new refrigerated warehouse which will cost $7,000,000 at t = 0 and which is expected to have operating cash flows of $500,000 at the end of each of the next 20 years. However, repairs which will cost $1,000,000 must be incurred at the end of the 10th year. Thus, at the end of Year 10 there will be a $500,000 operating cash inflow and an outflow of -$1,000,000 for repairs. If Houston's cost of capital is 12 percent, what is the project's MIRR? (Hint: Think carefully about the MIRR equation and the treatment of cash outflows.)

• A) 7.75%
• B) 8.29%
• C) 9.81%
• D) 11.45%
• E) 12.33%

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Definitions:

Nonneutral Tax

A tax that impacts differently on different types of economic activities, influencing the allocation of resources.

Perfectly Elastic

Describes a market situation where product demand or supply can vary greatly with a small change in price.

Excess Burden

The economic cost to society exceeding the revenue generated by a tax, often resulting from distortions in market behavior.

Economic Decisions

The choices made by individuals, businesses, governments, and other groups that affect the allocation of resources and the distribution of goods and services.