Question

Your division is considering two projects with the following cash flows (in millions): 0 1 2 3 Project A -$11 $4 $7 $1 Project B -$20 $12 $5 $9 What are the projects' NPVs assuming the WACC is 5%? Round your answer to two decimal places. Do not round your intermediate calculations. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative value should be indicated by a minus sign. Project A $ million Project B $ million What are the projects' NPVs assuming the WACC is 10%? Round your answer to two decimal places. Do not round your intermediate calculations. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative value should be indicated by a minus sign. Project A $ million Project B $ million What are the projects' NPVs assuming the WACC is 15%? Round your answer to two decimal places. Do not round your intermediate calculations. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative value should be indicated by a minus sign. Project A $ million Project B $ million What are the projects' IRRs assuming the WACC is 5%? Round your answer to two decimal places. Do not round your intermediate calculations. Project A % Project B % What are the projects' IRRs assuming the WACC is 10%? Round your answer to two decimal places. Do not round your intermediate calculations. Project A % Project B % What are the projects' IRRs assuming the WACC is 15%? Round your answer to two decimal places. Do not round your intermediate calculations. Project A % Project B % If the WACC was 5% and A and B were mutually exclusive, which project would you choose? (Hint: The crossover rate is 26.71%.) If the WACC was 10% and A and B were mutually exclusive, which project would you choose? (Hint: The crossover rate is 26.71%.) If the WACC was 15% and A and B were mutually exclusive, which project would you choose? (Hint: The crossover rate is 26.71%.)

Answer 1

NPV can be calculated as:

Project A = -11 + 4/(1+WACC) + 7/(1+WACC)^2 + 1/(1+WACC)^3

Project B = -20 + 12/(1+WACC) + 5/(1+WACC)^2 + 9/(1+WACC)^3

A. WACC = 5%

NPV of project A = 0.02 million

NPV of project B = 3.74 million

B. WACC = 10%

NPV of project A = -0.83 million

NPV of project B = 1.80 million

C. WACC = 15%

NPV of project A = -1.57 million

NPV of project B = 0.13 million

D. IRR can be calculated by equating present value of cash flows to 0.

Project A

0 = -11 + 4/(1+IRR) + 7/(1+IRR)^2 + 1/(1+IRR)^3

Project B

0 = -20 + 12/(1+IRR) + 5/(1+IRR)^2 + 9/(1+IRR)^3

Project A IRR = 5.12%

Project B IRR = 15.43%

E.

Project A IRR = 5.12%

Project B IRR = 15.43%

F.

Project A IRR = 5.12%

Project B IRR = 15.43%

G. WACC = 5% since project B has higher NPV and greater than zero, it should be chosen.

H. WACC = 10% since project B has higher NPV and greater than zero, it should be chosen.

I. WACC = 15% since project B has higher NPV and greater than zero, it should be chosen.