A firm with a 14% WACC is evaluating two projects for this year\'s capital budge

Question

A firm with a 14% WACC is evaluating two projects for this year's capital budget. After-tax cash flows, including depreciation, are as follows:

0 1 2 3 4 5
Project A -$18,000 $6,000 $6,000 $6,000 $6,000 $6,000
Project B -$54,000 $16,800 $16,800 $16,800 $16,800 $16,800





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?

If the projects are mutually exclusive, which would you recommend?

Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRR?

Explanation / Answer

Project A
NPV = -18000 + 6000(1/1.13 + 1/1.132+...+1/1.135) = 3102

IRR 0 = -18000 + 6000(1/r+ 1/r2+...+1/r5) r = 19.86%

project B

NPV =  -54000 +16800(1/1.13 + 1/1.132+...+1/1.135) = 5085.6

IRR, 0 =-54000 +16800(1/r + 1/r2+...+1/r5)= 16.80%

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