Capital budgeting criteria A firm with a 13% WACC is evaluating two projects for
ID: 2649484 • Letter: C
Question
Capital budgeting criteria
A firm with a 13% WACC is evaluating two projects for this year's capital budget. After-tax cash flows, including depreciation, are as follows:
Calculate NPV for each project. Round your answers to the nearest cent.
Project A $
Project B $
Calculate IRR for each project. Round your answers to two decimal places.
Project A %
Project B %
Calculate MIRR for each project. Round your answers to two decimal places.
Project A %
Project B %
Calculate payback for each project. Round your answers to two decimal places.
Project A years
Project B years
Calculate discounted payback for each project. Round your answers to two decimal places.
Project A years
Project B years
Assuming the projects are independent, which one or ones would you recommend?
-Select-Only Project A would be accepted because NPV(A) > NPV(B).Only Project B would be accepted because NPV(B) > NPV(A).Both projects would be accepted since both of their NPV's are positive.Only Project A would be accepted because IRR(A) > IRR(B).Both projects would be rejected since both of their NPV's are negative.Item 11
If the projects are mutually exclusive, which would you recommend?
-Select-If the projects are mutually exclusive, the project with the highest positive NPV is chosen. Accept Project B.If the projects are mutually exclusive, the project with the highest positive IRR is chosen. Accept Project A.If the projects are mutually exclusive, the project with the highest positive MIRR is chosen. Accept Project A.If the projects are mutually exclusive, the project with the shortest Payback Period is chosen. Accept Project A.If the projects are mutually exclusive, the project with the highest positive IRR is chosen. Accept Project B.Item 12
Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRR?
-Select-The conflict between NPV and IRR is due to the fact that the cash flows are in the form of an annuity.The conflict between NPV and IRR is due to the difference in the timing of the cash flows.There is no conflict between NPV and IRR.The conflict between NPV and IRR occurs due to the difference in the size of the projects.The conflict between NPV and IRR is due to the relatively high discount rate.Item 13
Explanation / Answer
Calculate NPV for each project. Round your answers to the nearest cent.
Project A
NPV = - Initial Investment + Annual Cash Flow*PVIFA(rate,nper)
NPV = - 15000 + 5000*PVIFA(13%,5)
NPV = -15000 + 5000*3.517231
NPV = $ 2586.16
Project B
NPV = - Initial Investment + Annual Cash Flow*PVIFA(rate,nper)
NPV = - 45000 + 14000*PVIFA(13%,5)
NPV = - 45000 + 14000*3.517231
NPV = $ 4241.24
Answer
Project A $ 2586.16
Project B $ 4241.24
Calculate IRR for each project. Round your answers to two decimal places.
Using Excel Formula
Project A
IRR = irr(values)
IRR = irr({-15000,5000,5000,5000,5000,5000})
IRR = 19.86%
Project B
IRR = irr(values)
IRR = irr({-45000,14000,14000,14000,14000,14000})
IRR = 16.80%
Answer
Project A 19.86 %
Project B 16.80 %
Calculate MIRR for each project. Round your answers to two decimal places.
Using Excel Formula
Project A
MIRR = mirr(values,finance rate, reinvestment rate)
MIRR = mirr({-15000,5000,5000,5000,5000,5000},13%,13%)
MIRR = 16.65%
Project B
MIRR = mirr(values,finance rate, reinvestment rate)
MIRR = mirr({-45000,14000,14000,14000,14000,14000},13%,13%)
MIRR = 15.05%
Answer
Project A 16.65 %
Project B 15.05 %
Calculate payback for each project. Round your answers to two decimal places.
Project A
Payback = Initial Investment/Annual Cash flow
Payback = 15000/5000
Payback = 3 years
Project B
Payback = Initial Investment/Annual Cash flow
Payback = 45000/14000
Payback = 3.21 years
Answer
Project A 3 years
Project B 3.21 years
Calculate discounted payback for each project. Round your answers to two decimal places.
Project A
Discounted Payback =4 + 127.64/2713.80
Discounted Payback =4.05 Years
Project B
Discounted Payback = 4 + 3357.40/7598.64
Discounted Payback = 4.44 years
Answer
Project A 4.05 years
Project B 4.44 years
Assuming the projects are independent, which one or ones would you recommend?
Both projects would be accepted since both of their NPV's are positive.
If the projects are mutually exclusive, which would you recommend?
If the projects are mutually exclusive, the project with the highest positive IRR is chosen. Accept Project A
Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRR?
The conflict between NPV and IRR occurs due to the difference in the size of the projects
Year Cash flow Present value Cumulative 0 -15000 - 15,000.00 - 15,000.00 1 5000 4,424.78 - 10,575.22 2 5000 3,915.73 - 6,659.49 3 5000 3,465.25 - 3,194.24 4 5000 3,066.59 - 127.64 5 5000 2,713.80 2,586.16Related Questions
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