Question

Max Laboratories is evaluating three independent projects. Project 1: Dog Treats, Project 2: Dog Food, and Project 3: Dog Toys. WAAC is 10%

	Treats	Food	Toys
	Cash Flows
Initial Investment	$         4,000,000	$             3,800,000	$         4,400,000
1	$         1,200,000	$                800,000	$         2,300,000
2	$         1,400,000	$             1,000,000	$         1,900,000
3	$         1,500,000	$             1,700,000	$         1,000,000
4	$         1,800,000	$             2,200,000	$           800,000
Std. Deviation of IRR	10%	8%	12%

1. Calculate Payback Period, NPV, IRR, and MIRR for all projects.

Which project(s) should the firm accept? Explain in detail the reasons for your recomendation.

2. Max Labs Inc. current portfolio of products has a 10% IRR and a 10% standard deviation. The correlation coefficients with the firm portfolio are 0.5 (r=0.5) for both, Dog Treats and Dog Food; zero correlation with Dog Toys (r=0).

A) Calculate the effect of each of the projects on the overall risk of the firm (standard deviation) and on the Coefficient of Variation (CV). To calculate the combined IRR and std. deviations, consider that the weight of each project is 20% of the total portfolio.

B) What is your opinion on Max Labs' coefficient of variation and total risk before and after undertaking each project.

Answer 1

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

Sub part		Treats	Food	Toys
1	Payback	2.93	3.14	2.2
2	NPV	604330.31	533583.77	558882.59
3	IRR	16.35%	15.30%	17.07%
4	MIRR	13.94%	13.67%	13.34%

Workings

Payback = Year in which Cumulative CF is last negative -(Last negative cumulative CF/ CF of next year

	Treats		Food		Toys
	Cash Flows	Cumulative CF		Cumulative CF		Cumulative CF
Initial Investment	-4,000,000	-4,000,000	-3800000	-3,800,000	-4400000	-4,400,000
1	1200000.00	-2800000	800000.00	-3000000	2300000.00	-2100000
2	1400000.00	-1400000	1000000.00	-2000000	1900000.00	-200000
3	1500000.00	100000	1700000.00	-300000	1000000.00	800000
4	1800000.00	1900000	2200000.00	1900000	800000.00	1600000