Question

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) of each project using an 8% discount rate. d) Calculate the NPV of each project at discount rates of 0%, 4%, 10%, and 16%). e) Calculate the incremental IRR (i.e., the cross-over rate) and construct an NPV profile graph to illustrate how the choice between the projects depends on the discount rate. Indicate when you should accept each project, making sure that you are explicit about the conclusions to be drawn from the NPV profile and provide specific numbers. (Do X if …; do Y if …; do Z if…)

Answer 1

We can calculate the desired results as follows:

Formulas used in the excel sheet are:

A) Payback Period of Project A = 3.32 years

Payback Period of Project B = 2 years

B) IRR of Project A = 12.27%

IRR of Project B = 16.77%

C) MIRR of Project A = 11.21%

MIRR of Project B = 11.82%

D i) NPV of Project A when Discount rate is 0% = $ 95,000

NPV of Project B when Discount rate is 0% = $ 65,000

ii) NPV of Project A when Discount rate is 4% = $ 58,498.26

NPV of Project B when Discount rate is 4% = $ 46,279.07

iii) NPV of Project A when Discount rate is 10% = $ 14,141.79

NPV of Project B when Discount rate is 10% = $ 22,334.54

iv) NPV of Project A when Discount rate is 16% = $ -20,712.17

NPV of Project B when Discount rate is 16% = $ 2,334.89

As there are multiple questions asked, I have solved the first 4 parts which has further sub parts. Please post the question separately for rest parts to be answered.

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