Question

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A company has a 13% WACC and is considering two mutually exclusive investments (that cannot be repeated) with the following cash flows: 12 3 4 5 6 Project A $300 - $387 $193 -$100 $600 $600 $850 - $180 Project B $405 $135 $135 $135 $135 $135 $135 $0 a. What is each project's NPV? Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest cent. Project A: $ 162.47 Project B: $ 134.67 b. What is each project's IRR? Do not round Intermediate calculations. Round your answers to two decimal places Project A: 22.5 % Project B: 24.29 % c. What is each project's MIRR? (Hint: Consider Period 7 as the end of Project B's life.) Do not round Intermediate calculations. Round your answers to two decimal places Project A: 10.63 % Project B: 10.41 % d. From your answers to parts a-c, which project would be selected? Project A If the WACC was 18%, which project would be selected?

Answer 1

B12 X fc =IRR(B3:B10) V B A C D E Cash flows Year T A 1 2 3 4 0 $ 1 $ 2 $ 3 $ 4 $ 5 $ 6 $ 7 $ 6 (300) $ (387) $ (193) $ (100) $ 600 $ 600 $ 850 $ (180) $ F G H Discount rate NPV Project A NPV Project B 0.00% $ 890.00 $ 405.00 5.00% 540.09 $ 280.22 10.00% 5 283.34 $ 182.96 12.00% $ 200.41 $ 150.04 15.00% $ 92.96 $ 105.91 18.10% $ -0.00 $ 66.01 24.29% % -143.44 $ 0.00 Difference (405) $ (105.00) 135 $ 522.00 135 $ 328.00 135 $ 235.00 135 $ (465.00) 135 $ (465.00) 135 $ (715.00) - $ 180.00 8 10 At 13%, Select Project A At 18%, Select Project B 18.10%) 24.29% 14.33% Crossover Rate 12 IRR 13 14 15 NPV @ 13% 16 17 18 NPV @ 18% $ $ 162.48 =NPV(13%,B4:B10)+B3 134.67 =NPV(13%,C4:C10)+C3 $ 31.05 ENPV(17%,B4:B10)+B3 $ 79.54 ENPV(17%,C4:C10)+C3 19 20 21 MIRR at 13% 22 15.60% 17.73% =MIRR(B3:B10,13%,13%) =MIRR(C3:C10,13%,13%) 23 24 MIRR at 18% 25 18.05% 20.62% =MIRR(B3:B10,18%,18%) =MIRR(C3:C10,18%,18%)

a) Project A Project B $ 162.48 Ś 134.67 b) Project A Project B 18.10% 24.29% c) Project A Project B 15.60% 17.73% d) At 13% At 18% Project A Project B f) Crossover Rate 14.33% 8) Project A Project B 18.05% 20.62%

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