Two projets a b Year Cash Flows Cash Flows 0 -1000 -1000 1 100 700 2 200 400 3 6

Question

Two projets

                                a                                    b

Year                    Cash Flows                  Cash Flows

0                          -1000                              -1000

1                             100                                  700

2                             200                                  400

3                             600                                  200

4                             800                                  100

A) Calculate Payback for each project

B) Calculate Net Present Value for each

C) If project A IRR is 18.24 % and B is 21.83 %. Which project would you accept if they are independent?

D. What if mutually exclusive?

E. Calcuate MIRR for each project.

Explanation / Answer

a) payback period of A = 3 + 100/800 = 3.125 years

payback period of B = 1 + 300/400 = 1.75 years

b) NPV of A = -1000 + 100/1.11 + 200/1.11^2 + 600/1.11^3 + 800/1.11^4 = 218.114

NPV of B = -1000 + 700/1.11 + 400/1.11^2 + 200/1.11^3 + 100/1.11^4 = 167.39

c) project B since its internal rate of return is more

d) project A since its NPV is more

e) MIRR of A = (1218.115/1000)^(1/4) - 1 = 5.056%

MIRR of B = (1167.39/1000)^(1/4) -1 = 3.945%

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