Question

CAPITAL BUDGETING CRITERIA A firm with a 13% WACC is evaluating two projects for this year's capital budget. After-tax cash flows, including depreciation are as follows 0 1 2 3 4 5 Project -$27.000 $9.000 59.000 9,000 $9.000 $9,000 Project-581,000 $25,200 $25,200 $25,200 $25,200 $25.200 - Calculate NPV for each project. Round your answers to the nearest cent. Do not round your intermediate calculations. Projects Proiect N $ Calculate IRR for each project. Round your answers to two decimal places. Do not round your intermediate calculations. Project N Calculate MIRR for each project. Round your answers to two decimal places. Do not round your intermediate calculations. Project M Project N Calculate payback for each project. Round your answers to two decimal places. Do not round your intermediate calculations. Project M Project N Calculate discounted payback for each project. Round your answers to two decimal places. Do not round your intermediate calculations Project M Project N b. Assuming the projects are independent, which one would you recommend? Yerdusive which would you recommend? the s have the same cash flow timisteen, why is there a conflict between NPV and IRRY

Answer 1

X New Microsoft Office Excel Worksheet Microsoft Excel Cia Formulas Data Home Insert Page Layout Review View %Cut Σ AutoSum A A Wrap Text Calibri Percentage 11 E Copy Сopy Fill E Merge & Center Conditional Format Formatting as Table Styles Sort & Find & Filter Select Paste +.0 .00 Cell Insert Delete Format BIU % .00.0 2 Clear Format Painter Editing Clipboard Font Alignment Number Styles Cells =MIRR ( 13546 :13551, 13%, 13%) J3554 F G Н K L M O P Q R. 3543 Project N 3544 Project M cash flow present vapresent value of cash flow cash flow* cash flow present value factor @13present value of cash flow Year 3545 Year 3546 0 -27000 1 -27000 0 -81000 1 -81000 3547 1 9000 0.884955752 7964.60177 1 25500 0.884956 22566.37 3548 2 9000 0.783146683 7048.32015 2 25500 0.783147 19970.24 3549 3 9000 0.693050162 6237.45146 25500 0.69305 17672.78 3550 4 9000 0.613318728 5519.86855 4 25500 0.613319 15639.63 3551 5 9000 0.542759936 4884.83942 5 25500 0.54276 13840.38 NPV sum of NPV sum of present present value value of cash flow of cash flow 3552 4655.08135 8689.397 IRR Using IRR function in MS IRR(N3546 IRR =Using IRR function in MS excel IRR(13546:13551) 19.86% excel N3551) 17.31% 3553 MIRR Using MIRR(N35 MIRR function 46:N3551, MIRR Using MIRR MIRR(13546:13551, function in MS excel 13%,13%) 13%,13%) 16.65% in MS excel 3554 15.33% 3555 Project M Payback period initial investment/annual 3556 27000/9000 cash flow 3 3557 Project N Sheet25 Sheet26 3558 Sheet27 Sheet28 Sheet29 Sheet22 Sheet23 Sheet24 Ill

X New Microsoft Office Excel Worksheet Microsoft Excel Cla Formulas Data Home Insert Page Layout Review View Cut Σ AutoSum A A Wrap Text Calibri Percentage 11 ECopy Fill Сopy BIU EB E Merge & Center Conditional Format Sort & Find & Filter Select Paste +.0 .00 Cell Insert Delete Format % .00.0 2Clear Format Painter Formatting as Table Styles Editing Clipboard Styles Font Alignment Number Cells fox IRR(N3546:N3551) O3553 F H K L M N P Q R. 3543 Project M Project N 3544 present vapresent value of cash flow cash flow* cash flow present value factor @13present value of cash flow Year cash flow 3545 Year 3546 0 -27000 -27000 0 -81000 1 -81000 3547 1 9000 0.884955752 7964.60177 1 25500 0.884956 22566.37 3548 2 9000 0.783146683 7048.32015 2 25500 0.783147 19970.24 3549 3 9000 0.693050162 6237.45146 25500 0.69305 17672.78 3550 4 9000 0.613318728 5519.86855 4 25500 0.613319 15639.63 3551 5 9000 0.542759936 4884.83942 5 25500 0.54276 13840.38 NPV sum of NPV sum of present present value 3552 value of cash flow of cash flow 4655.08135 8689.397 IRR Using IRR function in MS IRR(N3546 IRR =Using IRR function in MS excel IRR(13546:13551) :N3551) 19.86% excel 17.31% 3553 MIRR Using MIRR(N35 MIRR Using MIRR MIRR(13546:13551, MIRR function 46:N3551, function in MS excel 13%,13%) 13%,13%) 16.65% in MS excel 15.33% 3554 3555 Project M Payback period initial investment/annual 3556 27000/9000 cash flow 3557 Project N Sheet25 Sheet26 Sheet27 3558 Sheet28Sheet29 Sheet22 Sheet24 Sheet23 Ill

X New Microsoft Office Excel Worksheet Microsoft Excel Cia Formulas Data Home Insert Page Layout Review View %Cut Σ AutoSum A A Wrap Text Calibri Percentage 11 E Copy Сopy Fill E Merge & Center Conditional Format Formatting as Table Styles Sort & Find & Filter Select Paste +.0 .00 Cell Insert Delete Format BIU % .00.0 2 Clear Format Painter Editing Clipboard Font Alignment Number Styles Cells =MIRR ( 13546 :13551, 13%, 13%) J3554 F G Н K L M O P Q R. 3543 Project N 3544 Project M cash flow present vapresent value of cash flow cash flow* cash flow present value factor @13present value of cash flow Year 3545 Year 3546 0 -27000 1 -27000 0 -81000 1 -81000 3547 1 9000 0.884955752 7964.60177 1 25500 0.884956 22566.37 3548 2 9000 0.783146683 7048.32015 2 25500 0.783147 19970.24 3549 3 9000 0.693050162 6237.45146 25500 0.69305 17672.78 3550 4 9000 0.613318728 5519.86855 4 25500 0.613319 15639.63 3551 5 9000 0.542759936 4884.83942 5 25500 0.54276 13840.38 NPV sum of NPV sum of present present value value of cash flow of cash flow 3552 4655.08135 8689.397 IRR Using IRR function in MS IRR(N3546 IRR =Using IRR function in MS excel IRR(13546:13551) 19.86% excel N3551) 17.31% 3553 MIRR Using MIRR(N35 MIRR function 46:N3551, MIRR Using MIRR MIRR(13546:13551, function in MS excel 13%,13%) 13%,13%) 16.65% in MS excel 3554 15.33% 3555 Project M Payback period initial investment/annual 3556 27000/9000 cash flow 3 3557 Project N Sheet25 Sheet26 3558 Sheet27 Sheet28 Sheet29 Sheet22 Sheet23 Sheet24 Ill

X New Microsoft Office Excel Worksheet Microsoft Excel Ca Formulas Data Home Insert Page Layout Review View %Cut Σ AutoSum A A Wrap Text Percentage Calibri 11 ECopy Сopy Fill BIU EB E Merge & Center Conditional Format Sort & Find & Filter Select Paste +.0 .00 Cell Insert Delete Format % .00.0 2Clear Format Painter Formatting as Table Styles Editing Clipboard Styles Font Alignment Number Cells =MIRR ( N3546 : N3551,13%, 13%) O3554 F G Н K L M N P Q R. 3543 Project N 3544 Project M present vapresent value of cash flow cash flow* cash flow present value factor @13present value of cash flow Year cash flow 3545 Year 3546 0 -27000 -27000 0 -81000 1 -81000 3547 1 9000 0.884955752 7964.60177 1 25500 0.884956 22566.37 3548 2 9000 0.783146683 7048.32015 2 25500 0.783147 19970.24 3549 3 9000 0.693050162 6237.45146 25500 0.69305 17672.78 3550 4 9000 0.613318728 5519.86855 4 25500 0.613319 15639.63 3551 5 9000 0.542759936 4884.83942 5 25500 0.54276 13840.38 NPV sum of NPV sum of present present value value of cash flow of cash flow 3552 4655.08135 8689.397 IRR Using IRR function in MS IRR(N3546 IRR =Using IRR function in MS excel IRR(13546:13551) 17.31% 19.86% excel N3551) 3553 MIRR Using MIRR(N35 MIRR Using MIRR MIRR(13546:13551, 13%,13%) MIRR function 46:N3551, function in MS excel 13%,13%) 16.65% in MS excel 15.33% 3554 3555 Project M Payback period initial investment/annual 3556 27000/9000 cash flow 3 3557 Project N Sheet25 Sheet26 3558 Sheet23 Sheet24 Sheet27 Sheet28 Sheet29 Sheet22 Ready Circular References 100%

Project M					Project N
Year	cash flow	present value factor @13% = 1/(1+r)^n r =13%	present value of cash flow = cash flow*present value factor at 13%		Year	cash flow	present value factor @13% = 1/(1+r)^n r =13%	present value of cash flow = cash flow*present value factor at 13%
0	-27000	1	-27000		0	-81000	1	-81000
1	9000	0.884955752	7964.60177		1	25500	0.884956	22566.37
2	9000	0.783146683	7048.32015		2	25500	0.783147	19970.24
3	9000	0.693050162	6237.45146		3	25500	0.69305	17672.78
4	9000	0.613318728	5519.86855		4	25500	0.613319	15639.63
5	9000	0.542759936	4884.83942		5	25500	0.54276	13840.38
NPV = sum of present value of cash flow			4655.08135		NPV = sum of present value of cash flow			8689.397
IRR =Using IRR function in MS excel	IRR(I3546:I3551)	19.86%			IRR =Using IRR function in MS excel	IRR(N3546:N3551)	17.31%
MIRR =Using MIRR function in MS excel	MIRR(I3546:I3551,13%,13%)	16.65%			MIRR =Using MIRR function in MS excel	MIRR(N3546:N3551,13%,13%)	15.33%
Project M
Payback period = initial investment/annual cash flow	27000/9000	3
Project N
Payback period = initial investment/annual cash flow	81000/25500	3.18
Project M
Year	present value of cash flow = cash flow*present value factor at 13%	cumulative discounted cash flow
0	-27000
1	7964.60177	7964.60177
2	7048.32015	15012.92192
3	6237.45146	21250.37338
4	5519.868549	26770.24193
5	4884.839424	229.76	amount to be recovered in final year
Discounted payback period = year before final year of recovery+(amount to be recovered in final year/discounted cash flow of final year of recovery)	4+(229.76/4884.8394)	4.05
Project N
Year	present value of cash flow = cash flow*present value factor at 13%	cumulative discounted cash flow
0	-81000
1	22566.37168	22566.37168
2	19970.24043	42536.61211
3	17672.77914	60209.39125
4	15639.62756	75849.0188
5	13840.37837	5150.981199	amount to be recovered in final year
Discounted payback period = year before final year of recovery+(amount to be recovered in final year/discounted cash flow of final year of recovery)	4+(5150.98/13840.37)	4.37
b-	both projects would be accepted since both of their npv's are positive
c-	if the projects are mutually exclusive, the project with highest positive npv is choosen. Accept N
D-	the conflict between NPV and IRR occurs due to the difference in the size of projects