Question

1.  Problem 11.07

Click here to read the eBook: Net Present Value (NPV) Click here to read the eBook: Internal Rate of Return (IRR) Click here to read the eBook: Modified Internal Rate of Return (MIRR) Click here to read the eBook: Payback Period CAPITAL BUDGETING CRITERIA 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 M -$12,000 $4,000 $4,000 $4,000 $4,000 $4,000 Project N -$36,000 $11,200 $11,200 $11,200 $11,200 $11,200 Calculate NPV for each project. Round your answers to the nearest cent. Do not round your intermediate calculations. Project M    $ Project N    $ Calculate IRR for each project. Round your answers to two decimal places. Do not round your intermediate calculations. Project M      % Project N      % Calculate MIRR for each project. Round your answers to two decimal places. Do not round your intermediate calculations. Project M      % Project N      % Calculate payback for each project. Round your answers to two decimal places. Do not round your intermediate calculations. Project M      years Project N      years Calculate discounted payback for each project. Round your answers to two decimal places. Do not round your intermediate calculations. Project M      years Project N      years Assuming the projects are independent, which one(s) would you recommend? -Select-Both projects would be rejected since both of their NPV's are negative.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).Item 11 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.Item 12 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 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.The conflict between NPV and IRR is due to the fact that the cash flows are in the form of an annuity.Item 13

Answer 1

As per rules I am answering the first 4 subparts of the question

1:

NPV
Project M	$2,068.93
Project N	$3,392.99

2:

IRR
Project M	19.86%
Project N	16.80%

3:

MIRR
Project M	16.65%
Project N	15.05%

4:

Payback
Project M	3
Project N	3.21

WORKINGS

	0	1	2	3	4	5
Project M	($12,000)	$4,000	$4,000	$4,000	$4,000	$4,000
Cumulative CF	($12,000)	($8,000)	($4,000)	$0	$4,000	$8,000
Project N	($36,000)	$11,200	$11,200	$11,200	$11,200	$11,200
Cumulative CF	($36,000)	($24,800)	($13,600)	($2,400)	$8,800	$20,000