Question

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 3 4 5 Project M Project N - $12,000 $4,000 $4,000 $4,000 $4,000 $4,000 -$36,000 $11,200 $11,200 $11,200 $11,200 $11,200 a. Calculate NPV for each project. Do not round intermediate calculations. Round your answers to the nearest cent. Project M: $ Project N: $ Calculate IRR for each project. Do not round intermediate calculations. Round your answers to two decimal places. Project M: % Project N: Calculate MIRR for each project. Do not round intermediate calculations. Round your answers to two decimal places. Project M: Project N: Calculate payback for each project. Do not round intermediate calculations. Round your answers to two decimal places. Project M: years Project N: years Calculate discounted payback for each project. Do not round intermediate calculations. Round your answers to two decimal places. 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

Project M:

year 2 3 cash flow Discount factor @14% Present value 4000 0.877192982456 3508.77193 4000 0.769467528470 3077.870114 4000 0.674971516202 2699.886065 4000 0.592080277370 2368.321109 0.519368664360 2077.474657 Total 13732.32388 4

NPV = -initial cash outflow + present value of cash inflows

NPV of project M = -12000+13732.32388 = 1732.32(rounded to two decimals)

Project N:

year 1 ما می cash flow Discount factor @14% Present value 11200 0.877192982456 9824.561404 11200 0.769467528470 8618.036319 11200 0.674971516202 7559.680981 11200 0.592080277370 6631.299107 11200 0.519368664360 5816.929041 Total 38450.50685

NPV = -36000+38450.50685 = 2450.51(rounded to two decimal places)

IRR:

Project M:

f =IRR(B2:B7) B8 A Year C 1 - B cash flow -12000 4000 4000 4000 4000 4000 19.86% IRR

IRR = 19.86% using spread sheet. formula can be seen as above

Project N:

B8 A Year fx =IRR(B2:37) D E C 1 B cash flow -36000 11200 11200 11200 11200 11200 16.80% 8 IRR

IRR = 16.80%

MIRR:

Project M:

f =MIRR(B2:07,14%,14%) с 1 о. B8 • o А в Year cash flow -12000 4000 2 4000 з 4000 4 4000 5 4000 MIRR | 17.12% 7 8

MIRR = 17.12%

Project N:

B9 f c =MIRR(B3:38,14% 14%) D E F A B C 2 Year 3 0 cash flow -36000 11200 11200 11200 11200 11200 15.51% 1 2 3 4 5 MIRR 6 8 9

MIRR = 15.51%

NOTE:Reinvestment rate in MIRR is also taken as 14%

Payback period:

Payback Period = initial cash outflow / cash inflow

Project M:

Payback period = 12000 / 4000 = 3 Years

Project N:

Payback Period = 36000 / 11200 = 3.21 years

Discounted payback Period:

Discounted pay back = time required for Present value of discounted cash flows to recover initial cash outflow

Project M:

Total of first 4 years present value of cash flows = 11654.85

remaining amount required = 12000 - 11654.85 = 345.15

Discounted Pay Back = 4 + 345.15 / 2077.47

= 4.17 Years

Project N :

Total of first 4 years present value of cash flows = 32633.58

remaining amount required = 36000 - 32633.58 = 3366.42

Discounted Pay Back = 4 + 3366.42 / 5816.93

= 4.58 Years

B)

Both projects have positive Net present values.both can be selected

C)

it is given both projects are mutually exclusive so only one can be selected.it can be seen that Project B has highest NPV so project B should be selected.

D)

the conflict is Because both Projects are different in Size.Project B is larger than Project A.