1) Your company is considering two mutually exclusive projects whose costs and n

Question

1) Your company is considering two mutually exclusive projects whose costs and net cash flows are shown below. The projects are equally risky, their cost of capital is 12% and interim cash flow can be invested at 3%.

Calculate the NPV, IRR, Terminal Value and MIRR for each project and indicate which (if either) you'd recommend and why.

2) New division is considering two investment projects, each of which requires an up-front expenditure of $25 million. You estimate the cost of capital is 10% that the investments will produce following after-tax cash flows(in millions of dollars):

What is crossover rate?

Year X Y 0 -1000 -1000 1 100 1000 2 300 100 3 400 50 4 700 50

Explanation / Answer

Where MIRR is calculated as (sum of future value of cash flow/initial investment)^((1/last cash flow period)-1)*100

Project X is better because it has higher NPV, future value of cash flow and MIRR

Please ask Part 2 seperately

Project X Discount rate =   12.000% Compounding rate= 3.000% Year 0 1 2 3 4 Cash flow stream -1000 100 300 400 700 Discounting factor 1 1.12 1.2544 1.404928 1.573519 Discounted cash flows project -1000 89.28571 239.1582 284.7121 444.8627 Sum of discounted future cashflows = 58.01863 =NPV Discounting factor = (1 + Required rate)^(CORRESPONDING PERIOD IN YEARS) Discounted Cashflow= Cash flow stream/discounting factor Compounding factor= 0.970874 0.942596 0.915142 0.888487 FV of cash flows= 97.08738 282.7788 366.0567 621.9409 Sum of FV of cash flows= 1367.864 MIRR= 8.146062

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