Question

Questions A1-A2 are based on the following information You are considering two projects that are independent. Your firm has access to $70,000 only. Cost of capital for both projects is 12%. Project A costs $40,000 and generates cash flows of $9,600 per year for 15 years. Project B costs $60,000 and generates cash flows of $12,000 per year for 15 years. A1. What is the MIRR for Project A? (a) 16.7% (b) 14.34% (c) 12.87% (d) 15.73% 21.98% A2. What is the IRR for Project B? (a) 19.78% (b) 17.85% (c) 24.26% (d) 18.42% (e) 16.94% A3. You have $1,000,000 in investable assets. You desire to form an efficient portfolio that will generate 33% return on your money. RM = 25%, 0 M = .17.ŘEF = 8%?. How can you achieve this? (a) Borrow $979,590 at the rate of 8%. Invest borrowed funds plus your own money into the market portfolio. (b) Allocate your funds evenly across both the market portfolio and the risk free asset. (c) Borrow $1,590,000 at the rate of 8%. Invest borrowed funds plus your own money into the market portfolio. (d) Borrow $1,000,000 at the rate of 8%. Invest borrowed funds plus your own money into the market portfolio. (e) Borrow $470,588 at the rate of 8%. Invest borrowed funds plus your own money into the market portfolio

Answer 1

A1:

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Year UW BABOO vouw Project A Cash flow -40000 9600 9600 9600 9600 9600 9600 9600 9600 9600 9600 9600 9600 9600 9600 9600 =MIRR(12:117,12%,12%) MIRR

Year WNA Project A Cash flow -40000 9600 9600 9600 9600 9600 9600 9600 9600 9600 9600 9600 9600 9600 9600 9600 15.73% BBO00 V MIRR

Hence, MIRR for project A is 15.73%.

A2:

Year BBBO00 von AWNE Project B Cash flow -60000 12000 12000 12000 12000 12000 12000 12000 12000 12000 12000 12000 12000 12000 12000 12000 =IRR(12:117) IRR(values, guess]) 15 IRR

Year Project B Cash flow -60000 12000 12000 12000 12000 12000 12000 12000 12000 12000 12000 12000 12000 12000 12000 12000 18.42% IRR

Hence, IRR for project B is 18.42%

A3: Say, you need to borrow x amount at risk free rate

Hence, Total investable amount=(1000000+x)

Total amount of money invested in the market =(1000000+x)*(1+25%)

Value of total borrowed money=1.08*x

Now, Total Profit= Value of investment after 1 year-invested amount=33% of profit

=1000000+250000+x+0.25*x-1.08*x-1000000=1000000*33%=330000

or, 250000+0.17*x=330000

or, x=470588

Hence, You need to borrow $470588 at risk free rate and invest into the market portfolio.

Option e is correct.