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13. After a long drought the manager of LB Farm is considering the installation of an irrigation system which will cost $65.000. It is estimated that the irrigation system will increase revenues by $20,500 annually, although operating expenses other than depreciation will also increase by $5,000. The system will be depreciated using the 5 year MACRS schedule and it is assumed it will have zero market value at the end of its five year economic life. If the tax rate on ordinary income is 40 percent and the firm's cost of capital is 2%, due to a subsidized loan program, what is the project's NPV, IRR and MIRR and should it be accepted? The two 14. Green Giant is deciding among two mutually exclusive projects. projects have the following cash flows: Year مانا نا في Project A Cash Flow - $50,000 10,000 15,000 40,000 20,000 Project B Cash Flow -$27,500 6,000 12,000 18,000 12,000 ظر The company's cost of capital is 10 percent (WACC = 10$). What is the net present value (NPV) of the project with the highest MIRR? Which

Answer 1

All amount in "$"
Year	Revenue	Operating Cost	Depreciation	PBT	Tax	PAT	Depreciation	Total Cash Inflow	PV	Discounted Cash Flow	PV	Discounted Cash Flow
									2%		5%
1	20500	5000	13000	2500	1000	1500	13000	14500	0.9804	14216	0.9524	13810
2	20500	5000	13000	2500	1000	1500	13000	14500	0.9612	13937	0.9070	13152
3	20500	5000	13000	2500	1000	1500	13000	14500	0.9423	13664	0.8638	12526
4	20500	5000	13000	2500	1000	1500	13000	14500	0.9238	13396	0.8227	11929
5	20500	5000	13000	2500	1000	1500	13000	14500	0.9057	13133	0.7835	11361
								Total Inflow		68345		62777
								Total Outflow at 0 Year		65000		65000
								NPV		3345		-2223
1	NPV of project positive by 3345, so project is viable and should be accepted
2	IRR
	By Using Interpolation
	IRR =	L + A/(A-B) *(H-L)
	L			2%
	H			5%
	A			3345
	B			-2223
	=	2%+ 3345/3345-(-2223)* (5%-2%)
	=	2%+3345/5568 *3%
	=	2%+1.8%
IRR	=	3.80%
	IRR > WACC (3.8% > 2% ) the project rate of return will exceed it cost and as result project should be accepted.
3	MIRR
		P V of Outflow =	TV of Inflow / (1+MIRR)^n
		65000 =	68345 / (1+MIRR) ^5
		(1+MIRR) ^5	68345 /65000
		(1+MIRR) ^5	1.05
		By Trail & Error Method
		Rate 5 %	(1+0.05)^5	1.28
		1%	(1+0.01)^5	1.05
		MIRR =	1%
	Project A					B
Year	Revenue	PV   10%			Year	Revenue	PV   10%
0	-50000	1.0000	-50000		0	-27500	1.0000	-27500
1	10000	0.9091	9091		1	6000	0.9091	5455
2	15000	0.8264	12397		2	12000	0.8264	9917
3	40000	0.7513	30053		3	18000	0.7513	13524
4	20000	0.6830	13660		4	12000	0.6830	8196
		NPV	15200				NPV	9592
		MIRR
		P V of Outflow =	TV of Inflow / (1+MIRR)^n
		50000 =	65200 / (1+MIRR) ^4				27500 =	37092 / (1+MIRR) ^4
		(1+MIRR) ^4	65200 /50000				(1+MIRR) ^4	37092 /27500
			1.304				(1+MIRR) ^4	1.349
		(1+MIRR)	(1.304)^1/4				(1+MIRR)	(1.349)^1/4
		1+MIRR	1.0686				(1+MIRR)	1.0777
		MIRR	1.0686-1				MIRR	1.0777-1
			0.069					0.078
			7%					8%
	The NPV is $ 9592 of Project B with highest MIRR = 8%