Gardial Fisheries is considering two mutually exclusive investments. The project
ID: 2625918 • Letter: G
Question
Gardial Fisheries is considering two mutually exclusive investments. The projects' expected net cash flows are as follows:
Expected Net Cash Flows
Time Project A Project B
0 ($375) ($575)
1 ($300) $190
2 ($200) $190
3 ($100) $190
4 $600 $190
5 $600 $190
6 $926 $190
7 ($200) $0
"a. If each project's cost of capital is 12%, which project should be selected? If the cost of capital is 18%, what
project is the proper choice?"
@ 12% cost of capital @ 18% cost of capital
Use Excel's NPV function as explained in this chapter's Tool Kit. Note that the range does not include the costs, which are added separately.
WACC = 12% WACC = 18%
NPV A = NPV A =
NPV B = NPV B =
At a cost of capital of 12%, Project A should be selected. However, if the cost of capital rises to 18%, then the choice is reversed, and Project B should be accepted.
c. What is each project's IRR?
We find the internal rate of return with Excel's IRR function:
IRR A = Note in the graph above that the X-axis intercepts are equal to the two projects' IRRs.
IRR B =
"e. What is each project's MIRR at a cost of capital of 12%? At r = 18%? (Hint: Consider Period 7 as the end of
Project B's life.)"
@ 12% cost of capital @ 18% cost of capital
MIRR A = MIRR A =
MIRR B = MIRR B =
f. What is the regular payback period for these two projects?
Project A
Time period 0 1 2 3 4 5 6 7
Cash flow (375) (300) (200) (100) 600 $600 $926 ($200)
Cumulative cash flow
Payback
Project B
Time period 0 1 2 3 4 5 6 7
Cash flow (575) 190 190 190 190 $190 $190 $0
Cumulative cash flow
Payback
g. At a cost of capital of 12%, what is the discounted payback period for these two projects?
WACC = 12%
Project A
Time period 0 1 2 3 4 5 6 7
Cash flow (375) (300) (200) (100) 600 $600 $926 ($200)
Disc. cash flow
Disc. cum. cash flow
Discounted Payback
Project B
Time period 0 1 2 3 4 5 6 7
Cash flow (575) 190 190 190 190 $190 $190 $0
Disc. cash flow
Disc. cum. cash flow
Discounted Payback
h. What is the profitability index for each project if the cost of capital is 12%?
PV of future cash flows for A:
PI of A:
PV of future cash flows for B:
PI of B:
Explanation / Answer
Please find the attached excel file link. See if it helps :)
https://drive.google.com/file/d/0B5XS_-xnCDzZMVRycmlUSFRuWU0/edit?usp=sharing
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