Introduction to Finance

2. 
Find the NPV and PI of an annuity that pays $500 per year for eight 
years and costs $2,500. Assume a discount rate of 6 percent.
3. 
Find a project’s IRR that returns $17,000 three years from now if 
it costs $12,000.
4. 
Find a project’s IRR and MIRR if it has estimated cash fl ows 
of $5,500 annually for seven years, if its year-zero investment is 
$25,000, and the fi rm’s minimum required rate of return on the 
project is 10 percent.
5. 
For the following projects, compute NPV, IRR, MIRR, PI, and pay-
back. If these projects are mutually exclusive, which one(s) should be 
done? If they are independent, which one(s) should be undertaken?
A
B
C
D
Year 0 
–1,000
–1,500
–500
–2,000
Year 1 
400
500
100
600
Year 2 
400
500
300
800
Year 3 
400
700
250
200
Year 4 
400
200
200
300
Discount rate
10%
12%
15%
8%
6. 
The Sanders Electric Company is evaluating two projects for pos-
sible inclusion in the fi rm’s capital budget. Project M will require 
a $37,000 investment while project O’s investment will be $46,000. 
After-tax cash infl ows are estimated as follows for the two projects:
Year
Project M
Project O
1 $12,000
$10,000
2 
12,000
10,000
3 
12,000
15,000
4 
12,000
15,000
5 
15,000
a. 
Determine the payback period for each project.
b. 
Calculate the NPV and PI for each project based on a 10 percent 
cost of capital. Which, if either, of the projects is acceptable?
c. 
Determine the IRR and MIRR for projects M and O.