Bugs Bunny Enterprises (BBE) is considering two mutually exclusive projects. Project A will require an investment...

Bugs Bunny Enterprises (BBE) is considering two mutually exclusive projects. Project A will require an investment of $20 million today, and will return $7 million in each of the next 8 years. Project B will cost $30 million today and will pay a single lump sum of $175 million in year 11. BBE's weighted average cost of capital is 12.0 percent.

Calculate the NPV and IRR from each of these projects as well as the NPV and IRR of the differential cash flows. On your scratch paper, write out a table showing how you calculated the differential cash flows and what you input into your financial calculator.

Based on the incremental IRR rule, which project is preferred? In the box below, explain how you interpret the differential cash flows and apply the incremental IRR rule to choose between the two projects.

Solutions

Expert Solution

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Pepsico is considering two mutually exclusive projects. Both require an initial investment of $10,000, and their...

Pepsico is considering two mutually exclusive projects. Both require an initial investment of $10,000, and their risks are average for the firm. Project X has an expected life of 2 years with after-tax cash inflows of $5,300 and $7,000 at the end of Years 1 and 2, respectively. Project Y has an expected life of 4 years with after-tax cash inflows of $3,700 at the end of each of the next 4 years. The firm's WACC is 8%. Use the...

Your firm is considering two projects that are mutually exclusive. Each project will require an initial...

Your firm is considering two projects that are mutually exclusive. Each project will require an initial outlay of $200,000. The forecast yearly cash flows are shown below. Time Project A Project B 0 -200,000 -200,000 1 -25,000 120,000 2 80,000 80,000 3 100,000 40,000 4 140,000 25,000 a) Calculate the payback period (undiscounted) of each project. Include fractional periods (e.g., x.xx years) in your response, if applicable. b) Calculate the IRR of each project. c) Calculate the Modified IRR (MIRR)...

Wilson Co. is considering two mutually exclusive projects. Both require an initial investment of $10,000 at...

Wilson Co. is considering two mutually exclusive projects. Both require an initial investment of $10,000 at t = 0. Project X has an expected life of 2 years with after-tax cash inflows of $7,000 and $8,500 at the end of Years 1 and 2, respectively. Project Y has an expected life of 4 years with after-tax cash inflows of $4,600 at the end of each of the next 4 years. Each project has a WACC of 11%. What is the...

Wilson Co. is considering two mutually exclusive projects. Both require an initial investment of $10,000 at...

Wilson Co. is considering two mutually exclusive projects. Both require an initial investment of $10,000 at t = 0. Project X has an expected life of 2 years with after-tax cash inflows of $7,000 and $8,000 at the end of Years 1 and 2, respectively. Project Y has an expected life of 4 years with after-tax cash inflows of $5,000 at the end of each of the next 4 years. Each project has a WACC of 10%. What is the...

ST Inc. is considering two mutually exclusive projects. Both require an initial investment of $9100 at...

ST Inc. is considering two mutually exclusive projects. Both require an initial investment of $9100 at t = 0. Project X has an expected life of 2 years with after-tax cash inflows of $5,500 and $8200 at the end of Years 1 and 2, respectively. In addition, Project X can be repeated at the end of Year 2 with no changes in its cash flows. Project Y has an expected life of 4 years with after-tax cash inflows of $4800...

Mulroney Corp. is considering two mutually exclusive projects. Both require an initial investment of $10,000 at...

Mulroney Corp. is considering two mutually exclusive projects. Both require an initial investment of $10,000 at t = 0. Project X has an expected life of 2 years with after-tax cash inflows of $6,000 and $7,800 at the end of Years 1 and 2, respectively. In addition, Project X can be repeated at the end of Year 2 with no changes in its cash flows. Project Y has an expected life of 4 years with after-tax cash inflows of $4,300...

Axis Corp. is considering an investment in the best of two mutually exclusive projects. Project Kelvin...

Axis Corp. is considering an investment in the best of two mutually exclusive projects. Project Kelvin involves an overhaul of the existing system; it will cost $52,500 and generate cash inflows of $10,000 per year for the next 3 years. Project Thompson involves replacement of the existing system; it will cost $265,000 and generate cash inflows of $55,000 per year for 6 years. Using a(n) 10.36% cost of capital, calculate each project's NPV, and make a recommendation based on your...

Axis Corp. is considering an investment in the best of two mutually exclusive projects. Project Kelvin...

Axis Corp. is considering an investment in the best of two mutually exclusive projects. Project Kelvin involves an overhaul of the existing system; it will cost $5 and generate cash inflows of $10 per year for the next 33 years. Project Thompson involves replacement of the existing system; it will cost $265 and generate cash inflows of $61 per year for 66 years. Using a(n) 11.89 cost of capital, calculate each project's NPV, and make a recommendation based on your...

A company is considering two mutually exclusive projects. Both require an initial investment of $10,000 at t = 0

Using Excel (if applicable),A company is considering two mutually exclusive projects. Both require an initial investment of $10,000 at t = 0. Project X has an expected life of 2 years with after-tax cash inflows of $8,000 and $7,000 at the end of Years 1 and 2, respectively. In addition, Project X can be repeated at the end of Year 2 with no changes in its cost or cash flows. Project Y has an expected life of 4 years with...

A company is considering two mutually exclusive projects. Initial investment for Project A (IRR=32%) is 15,000...

A company is considering two mutually exclusive projects. Initial investment for Project A (IRR=32%) is 15,000 and for B (IRR=28%) 18,000. For both projects, life time of the projects is 5 years, required rate of return for both the projects is 10%. The net cash flows before the tax and depreciation are as given in the table below. For both projects tax of 40% on cash inflows is to be charged. Year 1 2 3 4 5 Project A 7000...

Subjects