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

ID: 2704002 • Letter: A

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;

Project A: -$600, $2000, $2000, $2000, $2000, $2000

Project B: -$18000,$5600, $5600,$5600, $5600,$5600

A. Calculate NPV,IRR,MIRR and discounted payback for ea. projcet.

B. Assuming the projcets are independent which one would you recommend?

C. If the projcets are mutually exclusive, which would you recomment?

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

(problem 11-7)

Please show step by step I prefer a step by step for a Financial calculator HP10bll+ Thanks, :)

Regular PaybackA = 3 years.

Discounted payback calculation: 0 14% 1 2 3 4 5

-6,000 2,000 2,000 2,000 2,000 2,000

Discounted CF: -6,000 1,754.39 1,538.94 1,349.94 1,184.16 1,038.74

Cumulative CF: -6,000 -4,245.61 -2,706.67 -1,356.73 -172.57 866.17

Discounted PaybackA = 4 + $172.57/$1,038.74 = 4.17 years.

Project B: CF0 = -18000; CF1-5 = 5600; I/YR = 14. Solve for NPVB = $1,225.25. IRRB = 16.80%.

MIRR calculation: 0 14%

1 | | -18,000 5,600 2 | 5,600 3 | 5,600 4 | 5,600 1.14 (1.14)^2 (1.14)^3 4 (1.14) ^5 |

5,600 6,384.00 7,277.76 8,296.65 9,458.18 37,016.59

Using a financial calculator, enter N = 5;

PV = -18000;

PMT = 0;

FV = 37016.59; and

solve for MIRRB = I/YR = 15.51%.

Payback calculation

: 0 1 | | -18,000 5,600

Cumulative

CF: -18,000 -12,400 2 | 5,600 -6,800 3 | 5,600 -1,200 4 | 5,600 4,400 5 | 5,600 10,000

Regular PaybackB = 3 + $1,200/$5,600 = 3.21 years.

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