Capital Budgeting Summary ProblemsA) A company is considering the following inve
ID: 2761761 • Letter: C
Question
Capital Budgeting Summary ProblemsA) A company is considering the following investment. It uses a WACC of 9% toevaluate projects. Please find the payback, NPV and IRR of the project anddetermine if the company should do the project.
Cost: $256,000Projected after tax cash inflows:
Year 1 $50,000
Year 2 65,000
Year 3 85,000
Year 4 115,000
Year 5 60,000
After tax Salvage Value at end of Year 5 50,000
B) There is another project the company is also considering. If this project and theproject outlined in Part A above are mutually exclusive, what decision should thecompany make? Please calculate payback, NPV and IRR for the project, tellwhich decision you would make with each methodology, and then tell what
decision you would make overall.
Cost $350,000
Projected after tax cash inflows:
Year 1 $75,000
Year 2 80,000
Year 3 90,000
Year 4 95,000
Year 5 65,000
After tax Salvage Value at end of Year 5 175,000
C) Given the following projects, calculate the MIRR for each. The company has an11% WACC. If the projects are independent, what decision should you makeregarding the projects? If the projects are mutually exclusive, what decision
should you make?
Project A: Cost $735 Project B: Cost $1,040
A-Tax Cash Inflows A-Tax Cash Inflows
Years 1-5: 400 Years 1-5 700
Explanation / Answer
The NPV is calculated using Excel formula =npv(rate,cash_inflow_range) - Inital cash outflow
The IRR is calculated using excel formual =irr(cash_flow_range)
The payback period = Last year of negative cumulative cash flow + absolute value of the cumulative cash flow that year/ Cash flow next year
A: The NPV, IRR and Payback for Part - A is as shown below:
B: The NPV, IRR and Payback for Part - B is as shown below:
Assuming the two projects are mutually exclusive, we would choose project B as it is having a higher NPV. Although the Payback period is higher and the IRR is lower than A, we would choose the NPV method over the other and choose project B
C: The MIRR for the 2 projects are as shown below:
Since project B has a higher MIRR, we would choose project B
Year Cash flows Cumulative cash flows 0 -256000 -256000 1 50000 -206000 2 65000 -141000 3 85000 -56000 4 115000 59000 5 110000 169000 NPV $ 63,177.71 IRR 16.83% Payback period(years) 3.49Related Questions
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