Question

CAPITAL BUDGETING CRITERIA A company has a 13% WACC and is considering two mutually exclusive investments (that cannot be repeated) with the following cash flows: 0 1 2 3 4 5 6 7 Project A -$300 -$387 -$193 -$100 $600 $600 $850 -$180 Project B -$405 $131 $131 $131 $131 $131 $131 $0 What is each project's NPV? Round your answer to the nearest cent. Do not round your intermediate calculations. Project A $ Project B $ What is each project's IRR? Round your answer to two decimal places. Project A % Project B % What is each project's MIRR? (Hint: Consider Period 7 as the end of Project B's life.) Round your answer to two decimal places. Do not round your intermediate calculations. Project A % Project B % From your answers to parts a-c, which project would be selected? If the WACC was 18%, which project would be selected? Construct NPV profiles for Projects A and B. Round your answers to the nearest cent. Do not round your intermediate calculations. Negative value should be indicated by a minus sign. Discount Rate NPV Project A NPV Project B 0% $ $ 5 10 12 15 18.1 23.01 Calculate the crossover rate where the two projects' NPVs are equal. Round your answer to two decimal places. Do not round your intermediate calculations. % What is each project's MIRR at a WACC of 18%? Round your answer to two decimal places. Do not round your intermediate calculations. Project A % Project B %

Answer 1

Ans a-c) for project A is given in below table:

	0	1	2	3	4	5	6	7
Cashflow	-$300.00	-$387.00	-$193.00	-$100.00	600.00	600.00	850.00	-180.00
Present Value	-$300.00	-$342.48	-$151.15	-$69.31	367.99	325.66	408.27	-76.51
NPV	$162.48
IRR	18.10%
MIRR	15.60%

For project B

	0	1	2	3	4	5	6	7
Cashflow	-$405.00	$131.00	$131.00	$131.00	$131.00	$131.00	$131.00	0.00
Present Value	-$405.00	$115.93	$102.59	$90.79	80.34	71.10	62.92	0.00
NPV	$118.68
IRR	23.01%
MIRR	17.23%

While analying above two table one should go with project A because NPV is greater for project A.

At 18% for project A

	0	1	2	3	4	5	6	7
Cashflow	-$300.00	-$387.00	-$193.00	-$100.00	600.00	600.00	850.00	-180.00
Present Value	-$300.00	-$327.97	-$138.61	-$60.86	309.47	262.27	314.87	-56.51
NPV	$2.66
IRR	18.10%
MIRR	18.05%

At 18% discount rate for project B

	0	1	2	3	4	5	6	7
Cashflow	-$405.00	$131.00	$131.00	$131.00	$131.00	$131.00	$131.00	0.00
Present Value	-$405.00	$111.02	$94.08	$79.73	67.57	57.26	48.53	0.00
NPV	$53.19
IRR	23.01%
MIRR	20.1%

At cost of capital 18% one should select project B because it has more NPV then project A.

Discount Rate (%)	NPV Project A	NPV Project B
0	$890.00	$381.00
5	$540.09	$259.92
10	$283.34	$165.54
12	$200.41	$133.59
15	$92.96	$90.77
18.1	$0.00	$52.01
23.01	-$117.69	$0.00

Crossover rate will be equal to 15.11% .