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Case “Cam Reddish” Inc “Cam Reddish” Inc. finances its three projects X, Y & Z with...
Case “Cam Reddish” Inc
“Cam Reddish” Inc. finances its three projects X, Y & Z
with a WACC of 10 percent.
The firm offered a project “X” with the following cash
flows:
Year Cash Flows
0 ($8,000)
1 $4,100
2 $3,600
3 $4,700
The company is thinking also of another two projects “Y” &
“Z” with the following information:
Project Y Z
NPV $2,789.50 $453.00
MIRR 18.25% 9.55%
IRR 16.25% 8.56%
Discounted Payback Period 2.44 years 5.33 Year
1. NPV for “X” is:
$4,400.00
$2,233.66
$3,100.55
$20,400.00
MIRR for "X" is:
11.00%
19.41%
8.88%
15.64%
Payback Period for "X" is:
1.94 years
2.37 years
2.06 years
3.00 years
Discounted payback period for "X":
2.06 years
1.64 years
2.37 years
3.00 years
5. Assuming the three project X, Y & Z are independent
then based on NPV criteria we can choose:
X, Y & Z
X & Z
Only X
Only Y
6. Assuming the three project X, Y & Z are Mutual
Exclusive then based on NPV criteria we can choose:
X, Y & Z
X & Z
Only X
Only Y
7. Assuming the three project X, Y & Z are independent
then based on MIRR criteria we can choose:
X, Y & Z
X & Y
Only X
Only Z
8. Assuming the three project X, Y & Z are Mutual
Exclusive then based on MIRR criteria we can choose:
X, Y & Z
X & Y
Only X
Only Z
9. If IRR for “X” is 17.95%, and the three project X, Y &
Z are Independent then based on IRR criteria we can choose:
X, Y & Z
X & Y
Only X
Only Y
10. Based on Discounted Payback Period we should choose:
Only X
Only Y
Only Z
X, Y & Z
Solutions
Expert Solution
| Project | X | Y | Z | |
| NPV | $ 2,234 | $ 2,789.50 | $ 453.00 | |
| IRR | 17.95% | 16.25% | 8.56% | |
| Modified IRR | 19.41% | 18.25% | 9.55% | |
| Payback Period | 2.06 | |||
| Discounted Pay Back Period | 2.37 | 2.44 | 5.33 | |
| WACC | = 10% | |||
| For Project X | ||||
| Computation of NPV | ||||
| Year | Cashflows | PVF@ 10% | PV | |
| A | 0 | $ (8,000) | 1 | $ (8,000) |
| PV of Cash Outflows | $ (8,000) | |||
| B | 1 | $ 4,100 | 0.9091 | $ 3,727.27 |
| 2 | $ 3,600 | 0.8264 | $ 2,975.21 | |
| 3 | $ 4,700 | 0.7513 | $ 3,531.18 | |
| $ 10,233.66 | ||||
| C | NPV | = B-A | $ 2,233.66 | |
| Computation of Payback Period | ||||
| Year | Cashflows | Cummulative Cashflows | ||
| 0 | $ (8,000) | |||
| 1 | $ 4,100 | $ 4,100 | ||
| 2 | $ 3,600 | $ 7,700 | ||
| 3 | $ 4,700 | |||
| Payback Period = | 2 years+ {(8000 - 7700) / 4700} | |||
| = | 2.06 | years | ||
| Computing Discounted Payback period | ||||
| Year | Cashflows | PVF@ 10% | PV | |
| 0 | $ (8,000) | 1 | ||
| 1 | $ 4,100 | 0.9091 | $ 3,727 | |
| 2 | $ 3,600 | 0.8264 | $ 2,975 | |
| 3 | $ 4,700 | 0.7513 | $ 3,531 | |
| Payback Period = | 2 years+ {(8000 - 6702) / 3531} | |||
| = | 2.37 | years | ||
| Computing Modified IRR | ||||
| Interim Cash inflows Invested @ WACC(10%) upto 3years | ||||
| Year | Cashflows | FVF | FV | |
| 1 | $ 4,100 | 1.21 | $ 4,961 | |
| 2 | $ 3,600 | 1.1 | $ 3,960 | |
| 3 | $ 4,700 | 1 | $ 4,700 | |
| Cash Inflows at end of Year 3 | $ 13,621 | |||
| 0 | $ (8,000) | 1 | $ (8,000) | |
| PV of Cash Outflows | $ (8,000) | |||
| Given Options | PVF for 3 years | |||
| 11% | 0.7312 | $ 9,960 | ||
| 19.41% | 0.5873 | $ 8,000 | ||
| 8.88% | 0.7747 | $ 10,553 | ||
| 15.64% | 0.6467 | $ 8,808 | ||
| For Modified IRR, | ||||
| PV of Cash Inflows | = | PV of Cash Outflows | ||
| $13621 * PVF(x%,3rd year) | = | $ 8,000 | ||
| Therefore, | Modified IRR | = | 19.41% | |
| Project | X | Y | Z | |
| NPV | $ 2,234 | $ 2,789.50 | $ 453.00 | |
| 5 | If Projects are Independent, all the Projects with Positive NPV can be Slected. | |||
| Ans: | X,Y & Z | |||
| 6 | If Projects are Mutually Exclusive, Project with Highest NPV Should be Selected | |||
| Ans: | Only Y | |||
| 7 | If Projects are Independent, all the Projects with Modified IRR which are greaterthan WACC can be Slected. | |||
| Ans: |
 jeff jeffy answered 2 years agoRelated SolutionsCase “Cam Reddish” Inc “Cam Reddish” Inc. finances its three projects X, Y & Z with...
Case “Cam Reddish” Inc
“Cam Reddish” Inc. finances its three projects X, Y & Z
with a WACC of 10 percent.
The firm offered a project “X” with the following cash
flows:
Year Cash Flows
0 ($8,000)
1 $4,100
2 $3,600
3 $4,700
The company is thinking also of another two projects “Y” &
“Z” with the following information:
Project Y Z
NPV $2,789.50 $453.00
MIRR 18.25% 9.55%
IRR 16.25% 8.56%
Discounted Payback Period 2.44 years 5.33 Year
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