Question

A company has a 11% WACC and is considering two mutually exclusive investments (that cannot be repeated) with the following cash flows:

0

1

2

3

4

5

6

7

Project A	-$300	-$387	-$193	-$100	$600	$600	$850	-$180
Project B	-$405	$135	$135	$135	$135	$135	$135	$0

The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.

Open spreadsheet

1. What is each project's NPV? Round your answer to the nearest cent. Do not round your intermediate calculations.

   Project A: $  

   Project B: $  

2. What is each project's IRR? Round your answer to two decimal places.

   Project A: %

   Project B: %

3. What is each project's MIRR? (Hint: Consider Period 7 as the end of Project B's life.) Round your answer to two decimal places. Do not round your intermediate calculations.

   Project A: %

   Project B: %

4. From your answers to parts a-c, which project would be selected?

   _________Project A or Project B

   If the WACC was 18%, which project would be selected?

   _________Project A or project B

5. What is the cross over rate?

6. Construct NPV profiles for Projects A and B. Round your answers to the nearest cent. Do not round your intermediate calculations. Negative value should be indicated by a minus sign.

   Discount Rate	NPV Project A	NPV Project B
   0%	$	$
   5	$	$
   10	$	$
   12	$	$
   15	$	$
   18.1	$	$
   24.29	$	$

7. Calculate the crossover rate where the two projects' NPVs are equal. Round your answer to two decimal places. Do not round your intermediate calculations.

   %

8. What is each project's MIRR at a WACC of 18%? Round your answer to two decimal places. Do not round your intermediate calculations.

   Project A: %

   Project B: %

Answer 1

a.

Time Years		0	1	2	3	4	5	6	7
Project A			-300	-387	-193	-100	600	600	850	-180
Project B			-400	133	133	133	133	133	133
Discounting Rate	1.11	1	0.900901	0.811622	0.731191	0.658731	0.593451	0.534641	0.481658
Discounted Flows A		-300	-348.649	-156.643	-73.1191	395.2386	356.0708	454.4447	-86.6985
Discounted Flows B		-400	119.8198	107.9458	97.24845	87.61122	78.92903	71.10723	0
NPV	Project A		240.6447
	Project B		162.6615

b. Internal Rate of Return is the rate at which cash outflows is equal to cash inflows. The different rates are tried and then, we find the IRR for Project B is 24.18% and Project A is 18.10%

Time Years		0	1	2	3	4	5	6	7
Project B			-400	133	133	133	133	133	133
Discounting Rate	1.2418	1	0.805283	0.64848	0.52221	0.420527	0.338643	0.272703	0.219603
Discounted Flows B		-400	107.1026	86.24786	69.45391	55.93003	45.03948	36.26951	0
NPV	Project B		0.043376
Time Years		0	1	2	3	4	5	6	7
Project A			-300	-387	-193	-100	600	600	850	-180
Discounting Rate	1.181	1	0.84674	0.716969	0.607086	0.514044	0.435262	0.368554	0.312069
Discounted Flows A		-300	-327.688	-138.375	-60.7086	308.4265	261.1571	313.2705	-56.1724
NPV	Project A		-0.09034

c. Modified Internal rate of Return is future value of positive cash flows divided by the present value of cash outflows. Hence MIRR of A = (600+800+850)/(300+328+138+61+57)*100 = 2.32%

MIRR of B= (133+133+133+133+133+133+0)/400*100 = 1.99%

d. From Answers (a-c) ,we would accept Project A since it has a better NPV and also a higher MIRR than Project B.

If the WACC was 18%, then the NPV of Project A is $2 and the NPV of Project B is $66. Hence, we would accept Project B in that case.

The excel calculations are also added.

Time Years Project A Project B Discounting Rate Discounted Flows A Discounted Flows B -300 -400 1 -300 -400 1 3 4 56 -387 -193 -100 600 600 850 -180 133 133 133 133 133 133 0.9009 0.81162 0.73119 0.65873 0.59345 0.53464 0.48166 -348.65 -156.64 -73.119 395.239 356.071 454.445 -86.699 119.82 107.946 97.2485 87.6112 78.929 71.1072 0 NPV Project A Project B 240.645 162.662 7 Time Years Project B Discounting Rate Discounted Flows B 1 2. 3 4 5 6 -400 133 133 133 133 133 133 1 0.80528 0.64848 0.52221 0.42053 0.33864 0.2727 -400 107.103 86.2479 69.4539 55.93 45.0395 36.2695 1.2418 0.2196 NPV Project B 0.04338 Time Years Project A Discounting Rate Discounted Flows A 3 4 5 6 7 -300 - 387 - 193 -100 600 600 850 -180 1 0.84674 0.71697 0.60709 0.51404 0.43526 0.36855 0.31207 -300 -327.69 -138.37 -60.709 308.426 261.157 313.271 -56.172 1.181 NPV Project A -0.0903