Compute the weighted average cost of capital for the firm. Simply, without consi
ID: 2720439 • Letter: C
Question
Compute the weighted average cost of capital for the firm.
Simply, without consideration for the life of the projects, calculate Payback, NPV, IRR, Profitability Index and MIRR for each project using the current cost of capital. Assume the reinvestment rate for MIRR is the weighted average cost of capital for the firm.
Based on your computations in requirement number one, which projects should be accepted? Note: Projects Exp2015-A, Exp2015-B and Exp2015-C are mutually exclusive.
Table 1 Mutually Exclusive Independent Independent Project Project Project Project Project Exp2015-A Exp2015-B Exp2015-C TT2015-A BH2015-A -S750,000.00 $195,000.00 $225,000.00 $214,500.00 $216,500.00 $229,400.00 $219,400.00 $210,400.00 $205,400.00 $195,400.00 $185,400.00 $840,000.00 $275,000.00 $295,000.00 $315,900.00 $200,000.00 $110,000.00 $90,000.00 $90,000.00 $80,000.00 $80,000.00 $70,000.00 CFO -$2,600,000.00-$1,250,000.00ST20,000.00 $625,000.00 $650,000.00 $750,000.00 $750,000.00 $775,000.00 $800,000.00 $675,000.00 $650,000.00 $625,000.00 $500,000.00 $258,900.00$261,900.00 $258,900.00$261,900.00 $258,900.00$261,900.00 $258,900.00$261,900.00 $258,900.00$261,900.00 $258,900.00 $258,900.00 $258,900.00 $258,900.00 $258,900.00 2 2 10Explanation / Answer
Discount rate taken for calculation of NPV is Weighted Average cost of Capital
Assuming 10% Debt and 90% Equity
WACC = (0.10*.07*.70+ 0.14*0.90)*100 = 13.09%
Calculation of NPV at WACC of 13.09%
NPV= PV of Cash Inflow- Cash Outflow
Project Exp2015A = $392390.10
Project Exp2015B = $191847.80
Project Exp2015C = $1120325
Project TT2015A = $149815.70
Project BH2015A = $199143.60
On the basis of NPV Project EXP2015C should be considered
Calculation of Payback Period
Project Exp2015A = 3 years 7 months
Project Exp2015B = 2 years 11 months
Project Exp2015C = 3 years 10 months
Project TT2015A = 4 years 10 months
Project BH2015A = 2 years 9 months
On the basis of payback period project BH2015A should be considered
Calculation of IRR
IRR is the rate at which PV of Cash Inflow equals to Cash Outflow
Project Exp2015A = 25.26%
Project Exp2015B = 20.87%
Project Exp2015C = 23.21%
Project TT2015A = 16.03%
Project BH2015A = 23.93%
On the basis of IRR project EXP2015A should be considered
Calculation of Profitability Index
Profitability Index= PV of Future cash Inlow/ Cash Outflow
Project Exp2015A = 1.52
Project Exp2015B = 1.23
Project Exp2015C = 1.43
Project TT2015A = 1.12
Project BH2015A = 1.28
On the basis of Profitability Index project EXP2015A should be considered
Calculation of MIRR
MIRR= (Sum of Terminal Cash Inflow/Initial Investment)1/n - 1
Project Exp2015A = 15.23%
Project Exp2015B = 12.28%
Project Exp2015C = 14.30%
Project TT2015A = 11.20%
Project BH2015A = 12.77%
On the basis of MIRR project EXP2015A should be considered
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