Question

Capital Budgeting Methods

Project S has a cost of $9,000 and is expected to produce benefits (cash flows) of $2,700 per year for 5 years. Project L costs $26,000 and is expected to produce cash flows of $7,100 per year for 5 years.

Calculate the two projects' NPVs, assuming a cost of capital of 10%. Do not round intermediate calculations. Round your answers to the nearest cent.

Project S: $   

Project L: $   

Which project would be selected, assuming they are mutually exclusive?

Based on the NPV values, -Select-Project SProject LItem 3  would be selected.

Calculate the two projects' IRRs. Do not round intermediate calculations. Round your answers to two decimal places.

Project S:   %

Project L:   %

Which project would be selected, assuming they are mutually exclusive?

Based on the IRR values, -Select-Project SProject LItem 6  would be selected.

Calculate the two projects' MIRRs, assuming a cost of capital of 10%. Do not round intermediate calculations. Round your answers to two decimal places.

Project S:   %

Project L:   %

Which project would be selected, assuming they are mutually exclusive?

Based on the MIRR values, -Select-Project SProject LItem 9  would be selected.

Calculate the two projects' PIs, assuming a cost of capital of 10%. Do not round intermediate calculations. Round your answers to three decimal places.

Project S:  

Project L:  

Which project would be selected, assuming they are mutually exclusive?

Based on the PI values,

Answer 1

Solution:-

To Calculate NPV of the Project-

Project S is accepted as higher NPV then Project L. NPV is higher the better. Project S seems to be profitable then Project L.

To Calculate IRR of the Project-

Project S is accepted as higher return then Project L. IRR is higher the better.

To Calculate MIRR of the Project-

Formula of Calculating MIRR-

MIRR =

Project S-

Future Value of Project S
Year	Cash flow	Compounding Factor @ 10%	Future Value
1	2700	1.4641	3953.07
2	2700	1.331	3593.7
3	2700	1.21	3267
4	2700	1.1	2970
5	2700	1	2700
		Future Value	16483.77

MIRR =

MIRR = 12.87%

Project L-

Future Value of Project L
Year	Cash flow	Compounding Factor @ 10%	Future Value
1	7100	1.4641	10395.11
2	7100	1.331	9450.1
3	7100	1.21	8591
4	7100	1.1	7810
5	7100	1	7100
		Future Value	43346.21

MIRR =

MIRR = 10.76%

Project S is selected as MIRR is higher than Project L. MIRR is higher the better.

To Calculate Profitabilty Index-

Formula of Profitability Index =

Project S-

Present Value of Project S
Year	Cash flow	Discounting Factor @10%	Present Value
1	2700	0.909	2454.55
2	2700	0.826	2231.40
3	2700	0.751	2028.55
4	2700	0.683	1844.14
5	2700	0.621	1676.49
		Present Value	10235.12

Profitability Index =

Profitability Index = 1.14

Project L-

Present Value of Project L
Year	Cash flow	Discounting Factor @10%	Present Value
1	7100	0.909	6454.55
2	7100	0.826	5867.77
3	7100	0.751	5334.34
4	7100	0.683	4849.40
5	7100	0.621	4408.54
		Present Value	26914.59

Profitability Index =

Profitability Index = 1.04

Project S is selected as its seems more profitable then Project L.

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