Problem 10-21 Payback, NPV, and MIRR Your division is considering two investment

Question

Problem 10-21 Payback, NPV, and MIRR Your division is considering two investment projects, each of which requires an up-front expenditure of$27 million. You estimate that the cost of capital is 11% and that the investments will produce the following after-tax cash flows (in millions of dollars): (17 points) Project A Project B 20 10 8 6 Year 10 15 20 4 a. What is the regular payback period for each of the projects? Round your answers to two decimal places Project A years Project B years b. What is the discounted payback period for each of the projects? Round your answers to two decimal places. Project A years Project B years c. If the two projects are independent and the cost of capital is 11%, which project or projects should the firm undertake? Select d. If the two projects are mutually exclusive and the cost of capital is 5%, which project should the firm undertake? -Select-

Explanation / Answer

Regular Payback perod of A =  2.25
Regular Payback perod of B = 1.70

Discounted Payback Period of A =  3.26
Discounted Payback Period of B = 2.15

Since they are independent project both   projects should be undertaken.

Since they are mutually exclusive projects Project A should be undertaken as it has higher NPV

Since they are mutually exclusive projects Project B should be undertaken as it has higher NPV.

As per chegg policy 4 subparts should be done .However 5 subparts have been done.
remaining subparts can be obtained from Chegg by placing the question again

Best of Luck. God Bless

Year 0 1 2 3 4 Project A -27 5 10 15 20 Cumulative Cash flows -27 -22 -12 3 23 Payback Period = Year before cash flows become positive + (- Cumulative cash flow of Year 3/Cash flow of Project A for Year 4) 2.25 Years Year 0 1 2 3 4 Project B -27 20 10 8 6 Cumulative Cash flows -27 -7 3 11 17 Payback Period = Year before cash flows become positive + (- Cumulative cash flow of Year 1/Cash flow of Project A for Year 2) 1.70 Years

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