Question

1. OmniCable Corporation is considering two mutually-exclusive capital projects, Project A and Project B. The estimated annual after-tax cash flows are detailed below. The company’s estimated weighted-average cost of capital (WACC) is 6.8%. (a) Which of the two projects, if either, should the company pursue? (b) Why? (c) What additional information would make your decision easier?

      (in $ millions)

Year              Project A                               Project B

0                    (3,525)                                (3,050)

1                        (614)                                    (120)

2                         923                                       725

3                     1,336                                   1,286

4                    2,086                                   1,525

5                    1,915                                   1,398

Answer 1

Statement showing Cash flows			Project A		Project B
Particulars	Time	PVf 6.8%	Amount	PV
Cash Outflows	-	1.00	(3,525.00)	(3,525.00)	(3,050.00)	(3,050.00)
Cash Outflows	1.00	0.9363	(614.00)	(574.91)	(120.00)	(112.36)
PV of Cash outflows = PVCO				(4,099.91)		(3,162.36)
Cash inflows	1.00	0.9363	-	-	-	-
Cash inflows	2.00	0.8767	923.00	809.21	725.00	635.62
Cash inflows	3.00	0.8209	1,336.00	1,096.71	1,286.00	1,055.67
Cash inflows	4.00	0.7686	2,086.00	1,603.35	1,525.00	1,172.15
Cash inflows	5.00	0.7197	1,915.00	1,378.20	1,398.00	1,006.12
PV of Cash Inflows =PVCI				4,887.47		3,869.56
NPV= PVCI - PVCO				787.57		707.20
Company should pursue Project A because of higher NPV
c) soft benefit of each project would have made decision easier. Soft benefits means those benefits whose quantitative value cannot be measured. We generally dont assign value to the soft benefits which occur as a result of investment,