Question

A firm with a 14% 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 M	-$30,000	$10,000	$10,000	$10,000	$10,000	$10,000
Project N	-$90,000	$28,000	$28,000	$28,000	$28,000	$28,000

1. Calculate NPV for each project. Do not round intermediate calculations. Round your answers to the nearest cent.

   Project M:    $  

   Project N:    $  

   Calculate IRR for each project. Do not round intermediate calculations. Round your answers to two decimal places.

   Project M:     %

   Project N:     %

   Calculate MIRR for each project. Do not round intermediate calculations. Round your answers to two decimal places.

   Project M:     %

   Project N:     %

   Calculate payback for each project. Do not round intermediate calculations. Round your answers to two decimal places.

   Project M:     years

   Project N:     years

   Calculate discounted payback for each project. Do not round intermediate calculations. Round your answers to two decimal places.

   Project M:     years

   Project N:     years

2. Assuming the projects are independent, which one(s) would you recommend?

   -Select-Only Project M would be accepted because NPV(M) > NPV(N).Only Project N would be accepted because NPV(N) > NPV(M).Both projects would be accepted since both of their NPV's are positive.Only Project M would be accepted because IRR(M) > IRR(N).Both projects would be rejected since both of their NPV's are negative.

3. If the projects are mutually exclusive, which would you recommend?

   -Select-If the projects are mutually exclusive, the project with the highest positive NPV is chosen. Accept Project N.If the projects are mutually exclusive, the project with the highest positive IRR is chosen. Accept Project M.If the projects are mutually exclusive, the project with the highest positive MIRR is chosen. Accept Project M.If the projects are mutually exclusive, the project with the shortest Payback Period is chosen. Accept Project M.If the projects are mutually exclusive, the project with the highest positive IRR is chosen. Accept Project N.

4. 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 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.The conflict between NPV and IRR is due to the relatively high discount rate.

Answer 1

Qa:

NPV, IRR, MIRR, Payback and Discounted payback ratio are calculated as shown using excel formulas ( =npv() @14% , =irr() ,=mirr() @14% ) for discounted payback, the cashflows are discounted at 14% by the equation CF/(1+14%)^n

Year	0	1	2	3	4	5
Project M	-$30,000	$10,000	$10,000	$10,000	$10,000	$10,000
Discounted casflow @14%	-$30,000	$8,772	$7,695	$6,750	$5,921	$5,194
NPV @14%	$4,330.81
IRR	19.858%
MIRR	17.116%
Payback period	3
Discounted payback	4.16

Year	0	1	2	3	4	5
Project N	-$90,000	$28,000	$28,000	$28,000	$28,000	$28,000
Discounted casflow	-$90,000	$24,561	$21,545	$18,899	$16,578	$14,542
NPV @14%	$6,126.27
IRR	16.798%
MIRR	15.511%
Payback period	3.214
Discounted payback	4.578

Qb:

---Both projects would be accepted since both of their NPV's are positive--

Qc:

---If the projects are mutually exclusive, the project with the highest positive NPV is chosen. Accept Project N----

Qd:

---The conflict between NPV and IRR occurs due to the difference in the size of the projects---