Question

A company has a 11% WACC and is considering two mutually exclusive investments (that cannot be repeated) with the following cash flows: 4 Project A Project B ($300) ($400) ($387) $132 ($193) $132 ($100) $132 $500 $132 $500 $132 $850 $132 ($180) $0 a. What is each project's NPV? Round your answer to the nearest cent. b. What is each project's IRR? Round your answer to two decimal places. c. What is each project's MIRR? d. From your answers to parts a-c, which project would be selected? Explain. e. If the WACC was 18%, which project would be selected? What would the difference in value created by the two projects be for a WACC of 18%? f. Calculate the crossover rate where the two projects' NPVs are equal. Round your answer to two decimal places. g. Explain the role played by the crossover rate in capital budgeting decisions.

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Answer 1

Using excel formula

	A	B	C	D	E	F	G	H	I
1	Year	0	1	2	3	4	5	6	7
2	Cash Flow Project A	-300	-387	-193	-100	600	600	850	-180
3	Cash Flow Project B	-400	132	132	132	132	132	132	0
4	NPV OF Project A	240.64	Excel formula=NPV(11%,C2:I2)+B2
5	NPV OF Project B	158.43	Excel formula=NPV(11%,C3:I3)+B3
6	IRR of Project A	18.10%	Excel formula=IRR(B2:I2)
7	IRR of Project B	23.86%	Excel formula=IRR(B3:I3)
8	MIRR of Project A	14.59%	Excel formula=MIRR(B2:I2.11%,11%)
9	MIRR of Project B	16.42%	Excel formula=MIRR(B3:I3.11%,11%)

from part a Project A should be selected because it has higher NPV

For Part B Project B must be selected because it has higher IRR.

For Part C Project B must be selected because it has higher  MIRR