Question

1. (50%) Given the following information about four mutually exclusive projects that will be repeated indefinitely, complete the table information (the shaded blanks). Assume that all projects are equally risky and will have the same cost of capital. A and B are mutually exclusive of each other, but independent of C and D, which are mutually exclusive of each other. Which project(s) should be chosen? (Note: This question is not related to the previous question. That is to say that the WACC for this table is not necessarily the same as you calculated in the previous question. Hint: The starting point for this problem is to find the terminal value for project A and use that to find the cost of capital (WACC).)

	A	B	C	D
CF0	($2,700,000)	($1,850,000)	($1,800,000)	($2,650,000)
Inflows	$850,000			$700,000
Project Life	7	4	5
NPV		$900,000	$600,000
IRR				24.00%
MIRR	18.50%
Terminal Value
WACC

Answer 1

	A	B	C	D
CF0	($2,700,000)	($1,850,000)	($1,800,000)	($2,650,000)
Inflows	$850,000	$925,604.07	$683,282.352	$700,000
Project Life	7	4	5	11.12073781
NPV	$1,052,711.69	$900,000	$600,000	$1,321,433.066
IRR	24.81%	34.95%	26.01%	24.00%
MIRR	18.50%	24.83%	19.75%	17.30%
Terminal Value	$8,859,153.30	$4,492,648.23	$4,432,751.579	$15,625,302.73
WACC	13.05569137% = 13.06 % (Rounded off)

Note : You can round off the figures as required. The figures specified are absolutely accurate and have been calculated without rounding off the WACC.

CALCULATIONS

In Project A, using the MIRR formula: MIRR = ((Terminal Value / CF₀ )^(1/n)) - 1, the value of Terminal Value is calculated. Hence, the other values have been calculated starting with the WACC.

NPV is calculated as Present Value of Cash Inflows less the Initial Cash Outflow.

IRR is the rate at which the Initial Cash Outflow and present value of Inflows are equal.

Inflow is the amount of inflow received at the end of each year.

Terminal value is the future value at the end of the project term of all the Cash Inflows.

MIRR is calculated using the formula: MIRR = ((Terminal Value / CF₀ )^(1/n)) - 1.

CONCLUSION

Since, Projects A and B are mutually exclusive, only one of them can be chosen. The most relevant measure of profitability is the Project's NPV which must be positive and which is higher in case of Project A. Hence, Project A must be chosen.

Since, Projects C and D are mutually exclusive, only one of them can be chosen. The most relevant measure of profitability is the Project's NPV which must be positive and which is higher in case of Project D. Hence, Project D must be chosen.

Therefore, Projects A and D must be chosen to get a cumulative net present value of $2,375,144.756.