Payback, NPV, and MIRR Your division is considering two investment projects, eac

Question

Payback, NPV, and MIRR

Your division is considering two investment projects, each of which requires an up-front expenditure of $24 million. You estimate that the cost of capital is 9% and that the investments will produce the following after-tax cash flows (in millions of dollars):

What is the regular payback period for each of the projects? Round your answers to two decimal places.

Project A years

Project B years

What is the discounted payback period for each of the projects? Round your answers to two decimal places.

Project A years

Project B years

If the two projects are independent and the cost of capital is 9%, which project or projects should the firm undertake?

If the two projects are mutually exclusive and the cost of capital is 5%, which project should the firm undertake?

If the two projects are mutually exclusive and the cost of capital is 15%, which project should the firm undertake?

What is the crossover rate? Round your answer to two decimal places.
%

If the cost of capital is 9%, what is the modified IRR (MIRR) of each project? Round your answers to two decimal places.

Project A %

Project B %

Year Project A Project B 1 5 20 2 10 10 3 15 8 4 20 6

Explanation / Answer

For project A

Calculation showing Payback period

Using interpolation we can find payback period

=9/15 = 0.6

Thus payback period = 2+0.6 = 2.6 years

For Project B

Calculation showing Payback period

Using interpolation we can find payback period

=4/10 = 0.4

Thus payback period = 1+0.4 = 1.4 years

For project A

calculation showing discounted payback period

Using interpolation we can find discounted payback period

11/11.59 = 0.949

Thus discounted payback period = 2+0.949 = 2.949 years

For project B

calculation showing discounted payback period

Using interpolation we can find discounted payback period

=5.65/8.42 = 0.67

Thus discounted payback period = 1+0.67 = 1.67 years

Statement showing NPV

For Project A

For project B

Thus project A should be selected

If cost of capital is 5%, then

Statement showing NPV

For project A

For project B

Project A should be selected

If cost of capital is 15%, then

Statement showing NPV

For Project A

For project B

Thus project B should be selected

Year Cash flow Cummulative cash flow 1 5 5 2 10 15 3 15 30 4 20 50

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