A firm with a 13% WACC is evaluating two projects for this year\'s capital budge
ID: 2774917 • Letter: A
Question
A firm with a 13% WACC is evaluating two projects for this year's capital budget. After-tax cash flows, including depreciation, are as follows: 0 1 2 3 4 5 Project A -$12,000 $4,000 $4,000 $4,000 $4,000 $4,000 Project B -$36,000 $11,200 $11,200 $11,200 $11,200 $11,200 a. Calculate NPV for each project. Round your answers to the nearest cent. Project A $ Project B $ Calculate IRR for each project. Round your answers to two decimal places. Project A % Project B % Calculate MIRR for each project. Round your answers to two decimal places. Project A % Project B % Calculate payback for each project. Round your answers to two decimal places. Project A years Project B years Calculate discounted payback for each project. Round your answers to two decimal places. Project A years Project B years b. Assuming the projects are independent, which one or ones would you recommend? -Select-Only Project B would be accepted because NPV(B) > NPV(A).Both projects would be accepted since both of their NPV's are positive.Only Project A would be accepted because IRR(A) > IRR(B).Both projects would be rejected since both of their NPV's are negative.Only Project A would be accepted because NPV(A) > NPV(B). c. If the projects are mutually exclusive, which would you recommend? -Select-If the projects are mutually exclusive, the project with the highest positive IRR is chosen. Accept Project A.If the projects are mutually exclusive, the project with the highest positive MIRR is chosen. Accept Project A.If the projects are mutually exclusive, the project with the shortest Payback Period is chosen. Accept Project A.If the projects are mutually exclusive, the project with the highest positive IRR is chosen. Accept Project B.If the projects are mutually exclusive, the project with the highest positive NPV is chosen. Accept Project B. d. Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRR? -Select-The conflict between NPV and IRR is due to the relatively high discount rate.The conflict between NPV and IRR is due to the fact that the cash flows are in the form of an annuity.The conflict between NPV and IRR is due to the difference in the timing of the cash flows.There is no conflict between NPV and IRR.The conflict between NPV and IRR occurs due to the difference in the size of the projects.
Explanation / Answer
a. Calculate NPV for each project. Round your answers to the nearest cent.
NPV
Project A = - Initial Investment + PVof Cash flow
Project A = -12000 + 4000*(1-(1+13%)^-5)/13%
Project A = $ 2068.93
Project B = - Initial Investment + PVof Cash flow
Project B = -36000 + 11200*(1-(1+13%)^-5)/13%
Project B = 3392.99
Calculate IRR for each project. Round your answers to two decimal places.
Project A = irr(values)
Project A = irr({-12000,4000,4000,4000,4000,4000})
Project A = 19.86%
Project B = irr(values)
Project B = irr({-36000,11200,11200,11200,11200,11200})
Project B = 16.80%
Calculate MIRR for each project. Round your answers to two decimal places.
Project A
FV of Cash Inflow = 4000*((1+13%)^5-1)/13%
FV of Cash Inflow = $ 25,921.08
MIRR = (FV of Cash Inflow/Initial Investment)^(1/n) - 1
MIRR = (25921.08/12000)^(1/5) - 1
MIRR = 16.65%
Project B
FV of Cash Inflow = 11200*((1+13%)^5-1)/13%
FV of Cash Inflow = $ 72579.03
MIRR = (FV of Cash Inflow/Initial Investment)^(1/n) - 1
MIRR = (72579.03/36000)^(1/5) - 1
MIRR = 15.05%
Calculate payback for each project. Round your answers to two decimal places.
Project A
Payback period = Initial investment/Annual Cash Flow
Payback period = 12000/4000
Payback period = 3 years
Project B
Payback period = Initial investment/Annual Cash Flow
Payback period = 36000/11200
Payback period = 3.21 years
Calculate discounted payback for each project. Round your answers to two decimal places.
Project A
Discounted payback = 4 + 102.11/2171.04
Discounted payback = 4.05 Years
Project B
Discounted payback = 4 + 2685.92/6078.91
Discounted payback = 4.44 Years
Working
b. Assuming the projects are independent, which one or ones would you recommend?
Both projects would be accepted since both of their NPV's are positive.
c. If the projects are mutually exclusive, which would you recommend?
If the projects are mutually exclusive, the project with the highest positive NPV is chosen. Accept Project B.
d. Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRR?
.
The conflict between NPV and IRR occurs due to the difference in the size of the projects.
Project A Year Cash flow PV factor PV of Cash flow Cumulataive of Pv of Cash flow 0 -12000 1.00000 (12,000.00) (12,000.00) 1 4000 0.88496 3,539.82 (8,460.18) 2 4000 0.78315 3,132.59 (5,327.59) 3 4000 0.69305 2,772.20 (2,555.39) 4 4000 0.61332 2,453.27 (102.11) 5 4000 0.54276 2,171.04 2,068.93Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.