Question

CAPITAL BUDGETING CRITERIA A firm with a 14% WACC is evaluating two projects for this year's capital budget. After-tax cash flows, including depreciation, are as follows: 0 1 2 5 Project M Project N - $30,000 $10,000 $10,000 $10,000 $10,000 $10,000 $90,000 $28,000 $28,000 $28,000 $28,000 $28,000 a. Calculate NPV for each project. Round your answers to the nearest cent. Do not round your intermediate calculations. Project M $ Project N $ Calculate IRR for each project. Round your answers to two decimal places. Do not round your intermediate calculations. Project M Project N Calculate MIRR for each project. Round your answers to two decimal places. Do not round your intermediate calculations. Project M Project N oja Calculate payback for each project. Round your answers to two decimal places. Do not round your intermediate calculations. Project M years Project N years Calculate discounted payback for each project. Round your answers to two decimal places. Do not round your intermediate calculations. Project M years Project N years b. Assuming the projects are independent, which one(s) would you recommend? -Select- c. If the projects are mutually exclusive, which would you recommend? -Select- d. Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRR? -Select-

Answer 1

I Cumulative discounted cash flows Project M Project N B11 - : X fix =IRR(B4:39) 2 А в с D E F G H Cash flows PVIF@14% Present value Simple cumulative cash flows 2 Year Project M Project N T Project M Project N Project M Project N L A x C | B C 40 $ (30,000) $ (90,000) 1.000 $ (30,000.00) $ (90,000.00) $ (30,000) $ (90,000) $ 5 1 $ 10,000 $ 28,000 0.877 $ 8,771.93 $ 24,561.40 $ (20,000) $ (62,000) $ 6 2 $ 10,000 $ 28,000 0.769 $ 7,694.68 $ 21,545.09 $ (10,000) $ (34,000) $ 3 $ 10,000 $ 28,000 0.675 $ 6,749.72 $ 18,899.20 $ - S (6,000) $ 4 $ 10,000 $ 28,000 0.592 $ 5,920.80 $ 16,578.25 $ 10,000 $ 22,000 $ 5 $ 10,000 $ 28,000 0.519 $ 5,193.69 $ 14,542.32 $ 20,000 $ 50,000 $ 10 11 IRR 19.86% 16.80% NPV $4,330.81 $6,126.27 12 13 MIRR 17.12% 15.51% Payback period 3.00 3.21 =MIRR(B4:39,14%,14%) =MIRR(C4:09,14%,14%) Years Years =3+6000/28000 MOOF WNL (30,000.00) $ (21,228.07) $ (13,533.39) $ (6,783.68) $ (862.88) $ 4,330.81 $ (90,000.00) (65,438.60) (43,893.51) (24,994.30) (8,416.06) 6,126.27 Discounted Payback period 4.17 4.58 Years Years =4+862.88/5193.69 =4+8416.06/14542.32 20 b) Correct option is "Both projects should be accepted since both of their NPV's are positive" 21 c) If the projects are mutually exclusive, the project with the highest positive NPV is chosen, Accept Project N." 22 d) The conflict between NPV and IRR occurs due to the difference in the size of the projects.

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