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 -$24,000 $8,000 $8,000 $8,000 $8,000 $8,000 Project N -$72,000 $22,400 $22,400 $22,400 $22,400 $22,400 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 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.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 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.Item 13

Answer 1

3

Project M
IRR is the rate at which NPV =0
IRR	0.198577097
Year	0	1	2	3	4	5
Cash flow stream	-24000	8000	8000	8000	8000	8000
Discounting factor	1	1.198577	1.436587	1.72186	2.0637824	2.473602
Discounted cash flows project	-24000	6674.581	5568.754	4646.138	3876.3777	3234.15
NPV = Sum of discounted cash flows
NPV Project M =	4.15694E-05
Where
Discounting factor =	(1 + IRR)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	19.86%
Project N
IRR is the rate at which NPV =0
IRR	0.167976214
Year	0	1	2	3	4	5
Cash flow stream	-72000	22400	22400	22400	22400	22400
Discounting factor	1	1.167976	1.364168	1.593316	1.8609555	2.173552
Discounted cash flows project	-72000	19178.47	16420.26	14058.73	12036.827	10305.71
NPV = Sum of discounted cash flows
NPV Project N =	3.06391E-06
Where
Discounting factor =	(1 + IRR)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	16.80%
Project M
Combination approach
All negative cash flows are discounted back to the present and all positive cash flows are compounded out to the end of the project’s life
Thus year 5 modified cash flow=(13511.68)+(11852.35)+(10396.8)+(9120)+(8000)
=52880.83
Thus year 0 modified cash flow=-24000
=-24000
Discount rate	0.14
Year	0	1	2	3	4	5
Cash flow stream	-24000	8000	8000	8000	8000	8000
Discount factor	1	1.14	1.2996	1.481544	1.6889602	1.925415
Compound factor	1	1.68896	1.481544	1.2996	1.14	1
Discounted cash flows	-24000	0	0	0	0	0
Compounded cash flows	-4.16667E-05	13511.68	11852.35	10396.8	9120	8000
Modified cash flow	-24000	0	0	0	0	52880.83
Discounting factor (using MIRR)	1	1.171163	1.371623	1.606395	1.8813501	2.203368
Discounted cash flows	-24000	0	0	0	0	24000
NPV = Sum of discounted cash flows
NPV=	7.62583E-05
MIRR is the rate at which NPV = 0
MIRR=	17.12%
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Compounding factor =	(1 + reinvestment rate)^(time of last CF-Corresponding period in years)
Compounded Cashflow=	Cash flow stream*compounding factor
Project N
Combination approach
All negative cash flows are discounted back to the present and all positive cash flows are compounded out to the end of the project’s life
Thus year 5 modified cash flow=(37832.71)+(33186.59)+(29111.04)+(25536)+(22400)
=148066.34
Thus year 0 modified cash flow=-72000
=-72000
Discount rate	0.14
Year	0	1	2	3	4	5
Cash flow stream	-72000	22400	22400	22400	22400	22400
Discount factor	1	1.14	1.2996	1.481544	1.6889602	1.925415
Compound factor	1	1.68896	1.481544	1.2996	1.14	1
Discounted cash flows	-72000	0	0	0	0	0
Compounded cash flows	-1.38889E-05	37832.71	33186.59	29111.04	25536	22400
Modified cash flow	-72000	0	0	0	0	148066.3
Discounting factor (using MIRR)	1	1.155114	1.334288	1.541254	1.7803241	2.056477
Discounted cash flows	-72000	0	0	0	0	72000
NPV = Sum of discounted cash flows
NPV=	3.20183E-05
MIRR is the rate at which NPV = 0
MIRR=	15.51%

Please ask remaining parts seperately