Question

Problem 11-6
NPV

Your division is considering two projects with the following cash flows (in millions):

0

1

2

3

Project A	-$17	$8	$8	$3
Project B	-$26	$13	$10	$9

What are the projects' NPVs assuming the WACC is 5%? Round your answer to two decimal places. (fill in the blank space)
Project A    $____ million
Project B    $____ million

What are the projects' NPVs assuming the WACC is 10%? Round your answer to two decimal places.
Project A    $____ million
Project B    $____ million

What are the projects' NPVs assuming the WACC is 15%? Round your answer to two decimal places.
Project A    $____ million
Project B    $____ million

What are the projects' IRRs assuming the WACC is 5%? Round your answer to two decimal places.
Project A ____%
Project B ____%

What are the projects' IRRs assuming the WACC is 10%? Round your answer to two decimal places.
Project A ____%
Project B ____%

What are the projects' IRRs assuming the WACC is 15%? Round your answer to two decimal places.
Project A ____%
Project B ____%

If the WACC were 5% and A and B were mutually exclusive, which would you choose? (Hint: The crossover rate is 20.19%.) (select multiple choice)
a.Project A

b.Project B

b.Neither A, nor B

If the WACC were 10% and A and B were mutually exclusive, which would you choose? (Hint: The crossover rate is 20.19%.) (select multiple choice)

a.Project A

b.Project B

b.Neither A, nor B

If the WACC were 15% and A and B were mutually exclusive, which would you choose? (Hint: The crossover rate is 20.19%.) (select multiple choice)

a.Project A

b.Project B

b.Neither A, nor B

Answer 1

1)
	At WACC 5%
	Project A	$ 0.47	million
	project B	$ 3.23	million
	Working:
				Project A			Project B
	Year	Discount factor		Cash flows	Present Value		Cash flows	Present Value
	a	b=1.05^-a		c	d=b*c		e	f=b*e
	0	1.0000		$                     -17	$        -17.00		$                 -26	$          -26.00
	1	0.9524		$                         8	$            7.62		$                  13	$            12.38
	2	0.9070		$                         8	$            7.26		$                  10	$              9.07
	3	0.8638		$                         3	$            2.59		$                     9	$              7.77
					$            0.47			$              3.23
2)
	At WACC 10%
	Project A	$            -0.86	million
	project B	$ 0.84	million
	Working:
				Project A			Project B
	Year	Discount factor		Cash flows	Present Value		Cash flows	Present Value
	a	b=1.10^-a		c	d=b*c		e	f=b*e
	0	1.0000		$                     -17	$        -17.00		$                 -26	$          -26.00
	1	0.9091		$                         8	$            7.27		$                  13	$            11.82
	2	0.8264		$                         8	$            6.61		$                  10	$              8.26
	3	0.7513		$                         3	$            2.25		$                     9	$              6.76
					$           -0.86			$              0.84
3)
	At WACC 15%
	Project A	$            -2.02	million
	project B	$            -1.22	million
	Working:
				Project A			Project B
	Year	Discount factor		Cash flows	Present Value		Cash flows	Present Value
	a	b=1.15^-a		c	d=b*c		e	f=b*e
	0	1.0000		$                     -17	$        -17.00		$                 -26	$          -26.00
	1	0.8696		$                         8	$            6.96		$                  13	$            11.30
	2	0.7561		$                         8	$            6.05		$                  10	$              7.56
	3	0.6575		$                         3	$            1.97		$                     9	$              5.92
					$           -2.02			$             -1.22
4)	At 5% WACC
		IRR
	Project A	6.77%
	project B	12.26%
	Working:
	IRR is the rate at which NPV is zero.
	Project A:
		NPV
	At 5%	$              0.47
	At 10%	$            -0.86
		IRR	=	5%+(10%-5%)*(0.47/(0.47+0.86))
			=	6.77%
	Project B:
		NPV
	At 5%	$              3.23
	At 15%	$            -1.22
		IRR	=	5%+(15%-5%)*(3.23/(3.23+1.22))
			=	12.26%