Question

CAPITAL BUDGETING CRITERIA 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 -$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

Answer 1

Calculation of NPV

For computing the NPV take discounting factors in column - 2. CF = Cash flows as given and PV is present value obtained by multiplying CF with DF ( Discounting factor)

		PROJECT - M		PROJECT - N
YEAR	DF	CF	PV	CF	PV
0	1	-12000	-12000	-36000	-36000
1	0.877193	4000	3508.772	11200	9824.561
2	0.769468	4000	3077.87	11200	8618.036
3	0.674972	4000	2699.886	11200	7559.681
4	0.59208	4000	2368.321	11200	6631.299
5	0.519369	4000	2077.475	11200	5816.929
		NPV	1732.32	NPV	2450.51

CALCULATION OF PAY BACK PERIOD

Project - M = Investment / cash flow = 12000 / 4000 = 3 years

Project - N = 36000 / 11200 = 3.21 years

Calculation of Post Pay back period

Project - M

Year	DF	CF	DCF	cummulated DCF
0	1	-12000	-12000	-12000
1	0.877193	4000	3508.772	-8491.23
2	0.769468	4000	3077.87	-5413.36
3	0.674972	4000	2699.886	-2713.47
4	0.59208	4000	2368.321	-345.151
5	0.519369	4000	2077.475

POST PAYBACK = 4 + 345.151 / 2077.475 = 4.17 Years.

Project - N

Year	DF	CF	DCF	cummulated DCF
0	1	-36000	-36000	-36000
1	0.877193	11200	9824.561	-26175.4
2	0.769468	11200	8618.036	-17557.4
3	0.674972	11200	7559.681	-9997.72
4	0.59208	11200	6631.299	-3366.42
5	0.519369	11200	5816.929

POST PAYBACK PERIOD = 4 + 3366.42 / 5816.929 = 4.58 Years