Question

A firm with a 14% WACC is evaluating two projects for this year's capital budget. After-tax cash flows, including depreciation, are as follows:

0

1

2

3

4

5

Project M	-$6,000	$2,000	$2,000	$2,000	$2,000	$2,000
Project N	-$18,000	$5,600	$5,600	$5,600	$5,600	$5,600

1. Calculate NPV for each project. Round your answers to the nearest cent. Do not round your intermediate calculations.
   Project M    $
   Project N    $

   Calculate IRR for each project. Round your answers to two decimal places. Do not round your intermediate calculations.
   Project M      %
   Project N      %

   Calculate MIRR for each project. Round your answers to two decimal places. Do not round your intermediate calculations.
   Project M      %
   Project N      %

   Calculate payback for each project. Round your answers to two decimal places. Do not round your intermediate calculations.
   Project M      years
   Project N      years

   Calculate discounted payback for each project. Round your answers to two decimal places. Do not round your intermediate calculations.
   Project M      years
   Project N      years

2. Assuming the projects are independent, which one(s) would you recommend?
   -Select-
   1. Both projects would be accepted since both of their NPV's are positive.
   2. Only Project M would be accepted because IRR(M) > IRR(N).
   3. Both projects would be rejected since both of their NPV's are negative.
   4. Only Project M would be accepted because NPV(M) > NPV(N).
   5. Only Project N would be accepted because NPV(N) > NPV(M).Item 11
3. If the projects are mutually exclusive, which would you recommend?
   -Select-
   1. If the projects are mutually exclusive, the project with the shortest Payback Period is chosen.
   2. Accept Project M.If the projects are mutually exclusive, the project with the highest positive IRR is chosen.
   3. Accept Project N.If the projects are mutually exclusive, the project with the highest positive NPV is chosen.
   4. Accept Project N.If the projects are mutually exclusive, the project with the highest positive IRR is chosen.
   5. Accept Project M.If the projects are mutually exclusive, the project with the highest positive MIRR is chosen.
   6. Accept Project M.Item 12
4. Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRR?
   -Select-
   1. The conflict between NPV and IRR occurs due to the difference in the size of the projects.
   2. The conflict between NPV and IRR is due to the relatively high discount rate.
   3. The conflict between NPV and IRR is due to the fact that the cash flows are in the form of an annuity.
   4. The conflict between NPV and IRR is due to the difference in the timing of the cash flows.
   5. There is no conflict between NPV and IRR.Item 13

Answer 1

				Cumulative cash flow		Present value	Cumulative Dis cash flow
	Year	Project M	Project N	Project M	Project N	PVIF @ 14%	Project M	Project N	Project M	Project N
	0	-6000	-18000	-6000	-18000	1	(6,000.00)	(18,000.00)	(6,000.00)	(18,000.00)
	1	2000	5600	-4000	-12400	0.877193	1,754.39	4,912.28	(4,245.61)	(13,087.72)
	2	2000	5600	-2000	-6800	0.769468	1,538.94	4,309.02	(2,706.68)	(8,778.70)
	3	2000	5600	0	-1200	0.674972	1,349.94	3,779.84	(1,356.74)	(4,998.86)
	4	2000	5600	2000	4400	0.59208	1,184.16	3,315.65	(172.58)	(1,683.21)
	5	2000	5600	4000	10000	0.519369	1,038.74	2,908.46	866.16	1,225.25
							866.16	1,225.25
Ans a)	NPV M		866.16
	NPV N		1,225.25
	IRR M		19.86%
	IRR N		16.80%
	MIRR M		17.12%
	MIRR N		15.51%
	Payback period M		3.00	year
	Payback period N		3.21	year
	Dis Payback period M		4.17	year
	Dis Payback period N		4.58	year
Ans B)	Both projects would be accepted since both of their NPV's are positive.
Ans c)	Accept Project N.If the projects are mutually exclusive, the project with the highest positive NPV is chosen.
Ans d)	The conflict between NPV and IRR occurs due to the difference in the size of the projects.
	The conflict between NPV and IRR is due to the difference in the timing of the cash flows.