Question

3. AICC is considering the following two projects: (2 pts)

Project Year 0 1 2 3 A Cash flows -$50 $15 $25 $25 B Cash flows -$50 $20 $25 $30

a. If these projects are mutually exclusive, which project should the company invest in based on the NPV and IRR if the WACC = 10%?

b. Calculate MIRR, payback period, and discounted payback period for the project you chose to invest in from part A only.

Answer 1

We can calculate the desired results using the excel sheet as below

Formula used in the excel sheet are

So, the IRR and NPV of both Projects are as follows

Project A : NPV = $ 3 IRR = 13.19%

Project B : NPV = $ 11 IRR = 21.65%

So, as the Project B has higher NPV and IRR than Project A, So project B is accepted.

b) Now we can calculate the MIRR, payback period, and discounted payback period as follows

Formulas used in the sheet are

Therefore the MIRR, Payback period and Discounted Payback period for project B are

MIRR = 17.78% , Payback Period = 2.17 years , Discounted Payback period = 2.48 years.

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