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 3 4 5 Project M Project N - $9,000 $3,000 $27,000 $8,400 $3,000 $8,400 $3,000 $8,400 $3,000 $8,400 $3,000 $8,400 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 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

B9 fx =IRR(B3:B8) 1 Project M 2 year Cash flows $ o 2 $ 3 $ Cumulative cash flows pv@14% Present value Cumulative cash flows (9,000.00) $ (9,000.00) 1.0000 $ (9,000.00) $ (9,000.00) 3,000.00 $ (6,000.00) 0.87721 $ 2,631.58 -6,368.42 3,000.00 $ (3,000.00) 0.7695 $ 2,308.40 -4,060.02 3,000.00 $ 0.6750 $ 2,024.91 -2,035.10 3,000.00 $ 3,000.00 0.5921 $ 1,776.24 -258.86 3,000.00 $ 6,000.00 0.5194 $ 1,558.11 1,299.24 19.86% $ 1,299.24 17.12% 52 NPV IRR 10 MIRR 11 12 Payback Period 13 Discounted Payback 14 Profitability Index 2+3000/3000 4+258.86/1558.11 1+1299.24/9000 3.00 Years 4.17 Years 1.14 15

E24 fc =SUM(E18:E23) B C D E 16 Project N 17 year 18 Cash flows 0 $ 11 $ 2 $ 3 $ 4 $ 5 $ Cumulative cash flows pv@14% Present value Cumulative cash flows (27,000.00) $ (27,000.00) 1.0000 $ (27,000.00) $ (27,000.00) 8,400.00 $ (18,600.00)| 0.8772 $ 7,368.42 -19,631.58 8,400.00 $ (10,200.00) 0.7695 $ 6,463.53 -13,168.05 8,400.00 $ (1,800.00) 0.6750 $ 5,669.76 -7,498.29 8,400.00 $ 6,600.00 0.5921 $ 4,973.47 -2,524.82 8,400.00 $ 15,000.00 0.5194 $ 4,362.70 1,837.88 16.80% NPV $ 1,837.88 15.51% 24 IRR 25 MIRR 26 27 Payback Period 28 Discounted Payback 29 Profitability Index 30 3+1800/8400 4+2524.82/4362.70 1+1837.88/27000 3.21 Years 4.58 Years 1.07

E9 fc =SUM(E3:E8) А 30 1 Project M 2 year Cash flows -9000 3000 3000 6 3 3000 74 3000 85 3000 9 IRR =IRR(B3:B8) 10 MIRR =MIRR(B3:38,0.14,0.14) 11 12 Payback Period 2+3000/3000 13 Discounted Payback 4+258.86/1558.11 14 Profitability Index 1+1299.24/9000 15 Cumulative cash flows pv@14% =B3 =C3+B4 =D3/1.14 =C4+B5 =D4/1.14 =C5+B6 =D5/1.14 =C6+B7 =D6/1.14 =C7+B8 =D7/1.14 NPV Present value =B3*D3 =B4*D4 =B5*D5 =B6*D6 =B7*D7 =B8*D8 =SUM E3:E8) Cumulative cash flows =E3 =F3+E4 =F4+E5 =F5+E6 =F6+E7 =F7+E8 =A6-C6/B7 -4+258.86/1558.11 =1+E9/-B3 Years Years

E24 for =SUM(E18:E23) C D . 16 Project N 17 year Cash flows 18 0 -27000 19 1 8400 20 2 8400 21 3 8400 224 8400 23 5 8400 24 IRR =IRR(B18:B23) 25 MIRE =MIRR(B18:B23,0.14,0.14) 26 27 Payback Period 3+1800/8400 28 Discounted Payback 4+2524.82/4362.70 29 Profitability Index 1+1837.88/27000 30 31 Cumulative cash flows pv@14% =B18 =C18+B19 -D18/1.14 =C19+B20 =D19/1.14 =C20+B21 =D20/1.14 =C21+B22 =D21/1.14 =C22+B23 =D22/1.14 NPV Present value Cumulative cash flows =B18*D18 =E18 =B19*D19 =F18+E19 =B20*D20 =F19+E20 =B21*021 =F20+E21 =B22*D22 =F21+E22 =B23*D23 1=F22+E23 -SUM(E18:E23) =3+1800/8400 -4+2524.82/4362.7 =1+E24/-B18 Years Years

Independent Both Mutually Exclusive Project N IRR calculation assumes that the rate at which cash flows can be reinvested at the Internal rate of return NPV calculation implicitly assumes that intermediate cash flows are reinvested at the Required rate of return