Question

Problem 1

Medical Technology Enterprises is trying to select the best investment from among four alternatives. The company’s cost ofcapital (CCC) is 14%. The initial cost and future cash flows of the alternatives are presented below(See pages 383 – 390). You can use Excel to solve this problem. If you do, please submit your homework document and the Excel file.

   

Year	Alternative A ($)	Alternative B (S)	Alternative C ($)	Alternative D ($)
0	-200,000	-200,000	-200,000	-200,000
1	70,000	0	60,000	90,000
2	80,000	0	60,000	100,000
3	70,000	90,000	60,000	100,000
4	40,000	100,000	60,000	0
5	30,000	100,000	60,000	0

(If you are not submitting an Excel file, PLEASE SHOW YOUR WORK for parts C, E, and G)

A) Calculate the Paybackperiod for each alternative and complete the following table (round to two decimal places):

	Alternative A	Alternative B	Alternative C	Alternative D
Payback period

B) Which of the alternatives would you select under the payback method? Please explain why.

C) Calculate the net present value (NPV) for each alternative and complete the following table (round to whole numbers):

	Alternative A	Alternative B	Alternative C	Alternative D
NPV

D) Which of the alternative would select under the net present value? Please explain why.

E) Calculate the internal rate of return (IRR) for each alternative and complete the following table (round to two decimal places):

	Alternative A	Alternative B	Alternative C	Alternative D
IRR

F) Which of the alternative would you select under the internal rate of return? Please explain why.

            

G) Calculate the modified internal rate of return (MIRR) for each alternative and complete the following table (round to two decimal places):

	Alternative A	Alternative B	Alternative C	Alternative D
MIRR

H) Which of the alternative would you select under the modified internal rate of return? Please explain why.

Answer 1

Answer A:

Workings:

Answer B:

There is no stated cut off payback period. The best alternative will be one which has lowest payback period.

As such based on payback period alternative D should be selected.

Answer C:

Workings:

Above excel with 'show formula':

Answer D:

Alternative D would be selected under the net present value.

All 4 alternatives have same initial investment of $200,000. Alternative B would be rejected since it has negative NPV. Other 3 alternatives have positive NPVs and hence are acceptable but since only one has to be selected, alternative D has highest NPV and would be selected.

Answer E:

Workings:

Workings are given above in answer C.

Answer F:

Under IRR, alternative D would be selected. Alternative B would be rejected since its IRR < CCC. Among alternatives A, C and D which are having IRR>CCC, alternative D will be selected since it has highest IRR.

Answer G:

Workings:

Workings are given above in answer C.

Answer H:

Under MIRR, alternative D would be selected. Alternative B would be rejected since its MIRR < CCC. Among alternatives A, C and D which are having MIRR>CCC, alternative D will be selected since it has highest MIRR.