Question

Your division is considering two projects. Its WACC is 10%, and the projects’ after-tax cash flows (in millions of dollars) would be as follows:

Time	0	1	2	3	4
Project A	-$30	$5	$10	$15	$20
Project B	-$30	$20	$10	$8	$6

a) Calculate the projects’ NPVs, IRRs, MIRRs, regular paybacks, and discounted paybacks.

b) If the two projects are independent, which project(s) should be chosen?

c) If the two projects are mutually exclusive and the WACC is 10%, which project(s) should be chosen?

d) Is it possible for conflicts to exist between the NPV and the IRR when independent projects are being evaluated? Explain your answer.

Answer 1

As per rules I am answering the first 4 subparts of the question.

The Cash flows andcumulative CFare as below:

Time	0	1	2	3	4
Project A	($30)	$5	$10	$15	$20
Cumulative CF	($30)	($25)	($15)	$0	$20
Project B	($30)	$20	$10	$8	$6
Cumulative CF	($30)	($10)	$0	$8	$14

1: NPV A = $7.74 m

NPV B = $6.55 m

2: IRR A = 19.19%

IRR B = 22.52%

3: MIRR A = 16.5%

MIRR B = 15.57%

4: Payback is the point in time when the investment is recovered.

Hence Payback A = 3 years

Payback B = 2 years

WORKINGS