Question

eBook Problem Walk-Through A company has a 12% WACC and is considering two mutually exclusive investments (that cannot be repeated) with the following cash flows: 0 1 2 3 4 5 6 7 Project A -$300 -$387 -$193 -$100 $600 $600 $850 -$180 Project B -$400 $135 $135 $135 $135 $135 $135 $0 What is each project's NPV? Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest cent. Project A: $   Project B: $   What is each project's IRR? Do not round intermediate calculations. Round your answers to two decimal places. Project A:   % Project B:   % What is each project's MIRR? (Hint: Consider Period 7 as the end of Project B's life.) Do not round intermediate calculations. Round your answers to two decimal places. Project A:   % Project B:   % From your answers to parts a-c, which project would be selected? -Select-Project AProject BItem 7 If the WACC was 18%, which project would be selected? -Select-Project AProject BItem 8 Construct NPV profiles for Projects A and B. If an amount is zero, enter 0. Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest cent. Discount Rate NPV Project A NPV Project B 0% $        $        5 10 12 15 18.1 24.83 Calculate the crossover rate where the two projects' NPVs are equal. Do not round intermediate calculations. Round your answer to two decimal places.   % What is each project's MIRR at a WACC of 18%? Do not round intermediate calculations. Round your answers to two decimal places. Project A:   % Project B:   %

Answer 1

A)NPV =Pv of inflows -Initial Outflow

NPV of Project A is Calculated using the formula =NPV(12%,B3:B9)+B2 we get $200.41

NPV of Project A is Calculated using the formula =NPV(12%,C3:C9)+C2 we get $155.04

b)IRR (internal rate of return) is the rate at which NPV =0

IRR for Project A is calculated using the formula =IRR(B2:B9) we get 18.10%

IRR for Project B is calculated using the formula =IRR(C2:C9) we get 24.83%

c)MIRR (modified Internal rate of return ) assumes the project's cash flows are reinvested at it's cost of capital

For Project A using the formula =MIRR(B2:B9,12%,12%)

For Project B using the formula

=MIRR(C2:C9,12%,12%)

d)Project A would be selected due to it's higher NPV

If WACC is 18% then Project B would be selected due to higher NPV

NPV@18% for project A =NPV(18%,B3:B9)+B2 we get 2.66

NPV @18% for project B =NPV(18%,C3:C9)+C2 we get 72.18