Question: The Sanders Electric Company is evaluating two projects for possible i

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Question: The Sanders Electric Company is evaluating two projects for possible inclusion in the firm’s capital budget. Project M will require a $37,000 investment while project O’s investment will be $46,000. After-tax cash inflows are estimated as follows for the two projects: Year Project M Project O 1 $12,000 $10,000 2 12000 10000 3 12000 15000 4 12000 15000 5 15000 a. Determine the payback period for each project. Payback (M) = Payback (O) = b. Calculate the net present value and profitability index for each project based on a 10 percent cost of capital. Which, if either, of the project is acceptable? NPV (M) = PI (M) = NPV (O) = PI (O) = c. Determine the internal rate of return and modified internal rate of return for Projects M and O. IRR (M): IRR (O): MIRR calculation of project M: MIRR calculation of project O: Question: The Sanders Electric Company is evaluating two projects for possible inclusion in the firm’s capital budget. Project M will require a $37,000 investment while project O’s investment will be $46,000. After-tax cash inflows are estimated as follows for the two projects: Year Project M Project O 1 $12,000 $10,000 2 12000 10000 3 12000 15000 4 12000 15000 5 15000 a. Determine the payback period for each project. Payback (M) = Payback (O) = b. Calculate the net present value and profitability index for each project based on a 10 percent cost of capital. Which, if either, of the project is acceptable? NPV (M) = PI (M) = NPV (O) = PI (O) = c. Determine the internal rate of return and modified internal rate of return for Projects M and O. IRR (M): IRR (O): MIRR calculation of project M: MIRR calculation of project O:

Explanation / Answer

Year Project M Project O Cum. Cashflow M Cum. Cashflow O 10% Present value M cashflow O cashflow 0 -37000 -46000 -37000 -46000 1            (37,000)              (46,000) 1 $12,000 $10,000 ($25,000) ($36,000) 0.909              10,908                   9,090 2 12000 10000 ($13,000) ($26,000) 0.826                 9,912                   8,260 3 12000 15000 ($1,000) ($11,000) 0.751                 9,012                11,265 4 12000 15000 $11,000 $4,000 0.683                 8,196                10,245 5 15000 $26,000 $4,000 0.621                 9,315                          -   26000 4000 NPV              10,343                (7,140) PI (47343/37000) (38860/46000) a. Determine the payback period for each project. 1.28 0.84 Payback (M) = 4.08 (4+(1000/12000)) IRR Payback (O) = 4.92 (4+(11000/12000)) b. Calculate the net present value and profitability index for each project based on a 10 percent cost of capital. Which, if either, of the project is acceptable? NPV (M) = 10343 PI (M) = 1.28 NPV (O) = -7140 PI (O) = 0.84 IRR (M): 20% IRR (O): 3.00% Year Project M Project O Cum. Cashflow M Cum. Cashflow O 20% Present value M cashflow 0 -37000 -46000 -37000 -46000 1        (37,000) 1 $12,000 $10,000 ($25,000) ($36,000) 0.833             9,996 2 12000 10000 ($13,000) ($26,000) 0.695             8,340 3 12000 15000 ($1,000) ($11,000) 0.579             6,948 4 12000 15000 $11,000 $4,000 0.482             5,784 5 15000 $26,000 $4,000 0.402             6,030 26000 4000 NPV                   98 Year Project M Project O Cum. Cashflow M Cum. Cashflow O 3% Present value O cashflow 0 -37000 -46000 -37000 -46000 1        (46,000) 1 $12,000 $10,000 ($25,000) ($36,000) 0.972             9,720 2 12000 10000 ($13,000) ($26,000) 0.943             9,430 3 12000 15000 ($1,000) ($11,000) 0.915           13,725 4 12000 15000 $11,000 $4,000 0.889           13,335 5 15000 $26,000 $4,000 0.621                    -   26000 4000 NPV                 210

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