Question

NPV: Your division is considering tow projects with the fllowing cash flows (in millions):

0 1 2 3

Proj A -$25 $5 $10 $17

Proj B -$20 $10 $9 $6

a. What are the projects NPVs assuming the WACC is 5%? 10%? 15%?

b. What are the projects IRRR at each of these WACCs?

c. IF the WACC was 5% and A and B were mutually exclisive, which project would you choose? what if the WACC was 10%? 15%?

Answer 1

NPV

CF0 = 52, 125CF1-8 = 12,000

i = 12% = 0.12 n = 8 years

NPV = -$52,125 + $12,000[(1 / i)-(1 / (i*(1+i)n)]

= -$52,125 + $12,000[(1 / 0.12)-(1 / (0.12(1+0.12)8)]

= -$52,125 + $12,000(4.9676) = $7,486.20.

NPV = $7,486.20

IRR

CF0 = -52,125

CF1-8 = 12,000

NPV @ 15% = -52125+(12000*4.4873)=1722

NPV @ 16% = -52125+(12000*4.3436)= -2 or 0(Approx)

IRR =16%

MIRR

PV Cost = 52,125 n = 8 years

i = 12% PMT = 12000

Future value (FV) = PMT[((1 + i )n-1) / i] = 12000[((1 + 0.12 )8-1 / 0.12] = 12000(12.299) = 147596.31

MIRR = (147596.31 / 52125)1/8-1 = 1.1389 – 1 = 0.1389 = 13.89%

Payback period