Question

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

Submit

Answer 1

1) Statement showing NPV

Year	Cash flow	PVIF @ 10%	PV
0	-8000	1.0000	-8000.00
1	4100	0.9091	3727.27
2	3600	0.8264	2975.21
3	4700	0.7513	3531.18
NPV = sum of PV	2233.66

Thus NPV = 2233.66$

2) Statement showing FV of +ve cash flow

Year	Cash flow	FVIF @ 10%	FV
1	4100	1.21	4961
2	3600	1.1	3960
3	4700	1	4700
FV of +ve cash flow	13621

MIRR = (FV of +ve cash flow/ PV of -ve cash flow)^1/n - 1

=(13621/8000)^1/3 - 1

=1.702625^0.3333 - 1

=1.1941-1

=0.1941

i.e 19.41%

3) Statement showing Payback period

Year	Cash flow	Cummulative cash flow
1	4100	4100
2	3600	7700
3	4700	12400

Now we can use interpolation to find discounted payback period

Year	Cummulative cash flow
2	7700.00
3	12400.00
1	4700.00
?	300.00

= 300/4700

=0.06

Thus payback period = 2+0.06 = 2.06 years

4) Statement showing Discounted Payback period

Year	Cash flow	PVIF @ 10%	PV	Cummulative cash flow
1	4100	0.9091	3727.27	3727.27
2	3600	0.8264	2975.21	6702.48
3	4700	0.7513	3531.18	10233.66

Now we can use interpolation to find discounted payback period

Year	Cummulative cash flow
2	6702.48
3	10233.66
1	3531.18
?	1297.52

=1297.52/3531.18

=0.3674

Thus discounted payback period = 2+0.3674 = 2.37 years