Question

Tools Table Window Help ne Insert Draw Design Layout References MailingsShare Comments Styles Styles Pane In reference to this video, suppose the fim's WACC exceeds the IRR for beth projects L and S if the projects are mutually exclaive, which project should the firm invest in? What if the projects are not matually exclusive, then which projects) should the firm invest in? (Hint If the WACC is greater than both projects' IRR, then both projects would delivery negative NPV.) 11-7 NPV Profles-Part 3 When we look at the NPV profiles for two projects, what exactly happens at the crossover point? If the WACC associated with the crossover point just so happens to equal the firm's WACC, wlich project,assuming thery are mahuly exclusive, sheould the firm sclect: project L or peoject ST 11-8 Payback Peried-No Discounting Find the payback in years (to the nearest tentrs place) for the folowing cash flow with a WACC of4% Time Period Cash Flow Cumalative Out of Pocket -60 10 100 20 70 .80 11-8 PaybackPeriod-Discounted Payboi Find the discounted payback i with . w ACC of 12% Hint interpolation must be umi and I have start ed the table for you. n years (to the nearest tenths place) for the following cash w Time Period Cash Flow PV of Cash Flow Cumalative 35.7 0 20 70 Page 3 of 3 630 words D Focus

Answer 1

Firm's WACC is the required rate of return from any investment.

IRR of a project is equal to the return provided by the project.

If the firm's WACC exceeds the IRR of both the projects- Project L and Project S, then the firm should not accept any project I.e. it should reject both. Answer remains the same if the projects are mutually exclusive.

11-8 payback period is the time period in which the initial investment is recovered, that is cumulative cash flow is zero.

Simple payback period = 2 + 10/20

= 2.5 years

In discounted payback period, the cash flows are discounted using WACC

Year	Cash Flows	Present Value Factor @12%	Discounted Cash Flows	Cumulative Cash Flows
0	-100	1	-100	-100
1	40	0.893	35.72	-64.28
2	50	0.797	39.85	-24.43
3	20	0.712	14.24	-10.19
4	70	0.636	44.52	34.33

Discounted Payback period = 3 + 10.19/44.52

= 3.23 years