Question

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

0

1

2

3

Project A	-$21	$14	$9	$3
Project B	-$35	$20	$8	$15

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 8.76%.)

   -Select-Project AProject BNeither A nor BItem 13

   If the WACC was 10% and A and B were mutually exclusive, which project would you choose? (Hint: The crossover rate is 8.76%.)

   -Select-Project AProject BNeither A nor BItem 14

   If the WACC was 15% and A and B were mutually exclusive, which project would you choose? (Hint: The crossover rate is 8.76%.)

   -Select-Project AProject BNeither A nor B

Answer 1

a) With WACC @ 5%, NPV of Project A is $ 3.09 Mn and Project B is $ 4.26 Mn

With WACC @ 10%, NPV of Project A is $ 1.42 Mn and Project B is $ 1.06 Mn

With WACC @ 15%, NPV of Project A is - $ 0.05 Mn and Project B is - $ 1.70 Mn

Ideally, IRR is calculated on the Normal cash flows and in this case, the IRR of Project A is 14.83% and Project B is 11.84%

b) With WACC @ 5%, IRR of Project A is 9.36% and Project B is 6.52%

With WACC @ 10%, IRR of Project A is 4.39% and Project B is 1.67%

With WACC @ 15%, NPV of Project A is - 0.15% and Project B is - 2.75%

c) With WACC @ 5%, Project B is chosen due to higher NPV

With WACC @ 10%, Project A is chosen due to higher NPV

With WACC @ 15%, Neither A nor B chosen as both the NPVs are negative

Computation of IRR: This can be computed using formula in Excel = IRR("range of cashflows", discounting factor%);

Computation of Net Present Value (NPV) based on the Discounted Cash flows; The Discounting factor is computed based on the formula: For year 0, the discounting factor is 1; For Year 1, it is computed as = Year 0 factor /(1+discounting factor%) ; Year 2 = Year 1 factor/(1+discounting factor %) and so on;

Next, the cashflows need to be multiplied with the respective years' discounting factor, to arrive at the discounting cash flows;

The total of all the discounted cash flows is equal to its respective Project NPV of the Cash Flows;