Question

Your division is considering two projects with the following cash flows (in millions):

0

1

2

3

Project A	-$20	$5	$9	$12
Project B	-$13	$8	$7	$3

1. What are the projects' NPVs assuming the WACC is 5%? Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to two decimal places.

   Project A:    $   million

   Project B:    $   million

   What are the projects' NPVs assuming the WACC is 10%? Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to two decimal places.

   Project A:  $   million

   Project B:  $   million

   What are the projects' NPVs assuming the WACC is 15%? Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to two decimal places.

   Project A:  $   million

   Project B:  $   million

2. What are the projects' IRRs assuming the WACC is 5%? Do not round intermediate calculations. Round your answer to two decimal places.

   Project A:   %

   Project B:   %

   What are the projects' IRRs assuming the WACC is 10%? Do not round intermediate calculations. Round your answer to two decimal places.

   Project A:   %

   Project B:   %

   What are the projects' IRRs assuming the WACC is 15%? Do not round intermediate calculations. Round your answer to two decimal places.

   Project A:   %

   Project B:   %

3. If the WACC was 5% and A and B were mutually exclusive, which project would you choose? (Hint: The crossover rate is 3.86%.)

   -Select-Project AProject BNeither A nor B

   If the WACC was 10% and A and B were mutually exclusive, which project would you choose? (Hint: The crossover rate is 3.86%.)

   -Select-Project AProject BNeither A nor B

   If the WACC was 15% and A and B were mutually exclusive, which project would you choose? (Hint: The crossover rate is 3.86%.)

   -Select-Project AProject BNeither A nor B

Answer 1

	PROJECT A:
	Year	Cash Flow	PVIF at 5%	PV at 5%	PVIF at 10%	PV at 10%	PVIF at 15%	PV at 15%	PVIF at 12%	PV at 12%	PVIF at 13%	PV at 13%
	0	$                    (20.00)	1	$            (20.00)	1	$            (20.00)	1	$      (20.00)	1.0000	$             (20.00)	1	$       (20.00)
	1	$                         5.00	0.95238	$                 4.76	0.90909	$                4.55	0.86957	$           4.35	0.8929	$                 4.46	0.88496	$            4.42
	2	$                         9.00	0.90703	$                 8.16	0.82645	$                7.44	0.75614	$           6.81	0.7972	$                 7.17	0.78315	$            7.05
	3	$                      12.00	0.86384	$              10.37	0.75131	$                9.02	0.65752	$           7.89	0.7118	$                 8.54	0.69305	$            8.32
	NPV			$                 3.29		$                1.00		$         (0.96)		$                 0.18		$          (0.21)
	IRR = 12%+1%*0.18/(0.18+0.21) =	12.46%
	PROJECT B:
	Year	Cash Flow	PVIF at 5%	PV at 5%	PVIF at 10%	PV at 10%	PVIF at 15%	PV at 15%	PVIF at 21%	PV at 21%	PVIF at 22%	PV at 22%
	0	$                    (13.00)	1	$            (13.00)	1	$            (13.00)	1	$      (13.00)	1	$             (13.00)	1	$       (13.00)
	1	$                         8.00	0.95238	$                 7.62	0.90909	$                7.27	0.86957	$           6.96	0.82645	$                 6.61	0.81967	$            6.56
	2	$                         7.00	0.90703	$                 6.35	0.82645	$                5.79	0.75614	$           5.29	0.68301	$                 4.78	0.67186	$            4.70
	3	$                         3.00	0.86384	$                 2.59	0.75131	$                2.25	0.65752	$           1.97	0.56447	$                 1.69	0.55071	$            1.65
	NPV			$                 3.56		$                2.31		$           1.22		$                 0.09		$          (0.09)
	IRR = 21%+1%*0.09/(0.09+0.09) =	21.50%
	ANSWERS:
a]	NPV OF THE PROJECTS:	Discount Rate
			5.00%	10.00%	15.00%
	Project A		$                3.29	$                 1.00	$               (0.96)
	Project B		$                3.56	$                 2.31	$                 1.22
b]	IRR OF THE PROJECTS:
	Project A		12.46%	12.46%	12.46%
	Project B		21.50%	21.50%	21.50%
	IRR is the same, as IRR is independent of the WACC.
c]	If the WACC was 5% and A and B were mutually exclusive, which project would you choose? (Hint: The crossover rate is 3.86%.)
	Project B
	If the WACC was 10% and A and B were mutually exclusive, which project would you choose? (Hint: The crossover rate is 3.86%.)
	Project B
	If the WACC was 15% and A and B were mutually exclusive, which project would you choose? (Hint: The crossover rate is 3.86%.)
	Project B