Question

CAPITAL BUDGETING CRITERIA 1. A firm with a 13% 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 -$18,000 $6,000 $6,000 $6,000 $6,000 $6,000 Project N -$54,000 $16,800 $16,800 $16,800 $16,800 $16,800 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 Assuming the projects are independent, which one(s) would you recommend? -Select-Both projects would be accepted since both of their NPV's are positive.Only Project M would be accepted because IRR(M) > IRR(N).Both projects would be rejected since both of their NPV's are negative.Only Project M would be accepted because NPV(M) > NPV(N).Only Project N would be accepted because NPV(N) > NPV(M).Item 11 If the projects are mutually exclusive, which would you recommend? -Select-If the projects are mutually exclusive, the project with the shortest Payback Period is chosen. Accept Project M.If the projects are mutually exclusive, the project with the highest positive IRR is chosen. Accept Project N.If the projects are mutually exclusive, the project with the highest positive NPV is chosen. Accept Project N.If the projects are mutually exclusive, the project with the highest positive IRR is chosen. Accept Project M.If the projects are mutually exclusive, the project with the highest positive MIRR is chosen. Accept Project M.Item 12 Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRR? 2. A firm with a WACC of 10% is considering the following mutually exclusive projects: 0 1 2 3 4 5 Project 1 -$350 $50 $50 $50 $190 $190 Project 2 -$400 $250 $250 $55 $55 $55 Which project would you recommend? Select the correct answer. a. Project 2, since the NPV2 > NPV1. b. Neither Project 1 nor 2, since each project's NPV < 0. c. Both Projects 1 and 2, since both projects have NPV's > 0. d. Both Projects 1 and 2, since both projects have IRR's > 0. e. Project 1, since the NPV1 > NPV2.

Answer 1

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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@13% Present value Simple cumulative cash flows 2 Year Project M Project N T Project M Project N Project M Project N A x C | B C 40 $ (18,000) $ (54,000) 1.000 $ (18,000.00) $ (54,000.00) $ (18,000) $ (54,000) $ 5 1 $ 6,000 $ 16,800 0.885 $ 5,309.73 $ 14,867.26 $ (12,000) $ (37,200) $ 6 2 $ 6,000 $ 16,800 0.783 $ 4,698.88 $ 13,156.86 $ 6,000) $ (20,400) $ 3 $ 6,000 $ 16,800 0.693 $ 4,158.30 $ 11,643.24 $ - $ (3,600) $ 4 $ 6,000 $ 16,800 0.613 $ 3,679.91 $ 10,303.75 $ 6,000 $ 13,200 $ 5 $ 6,000 $ 16,800 0.543 $ 3,256.56 $ 9,118.37 | $ 12,000 $ 30,000 $ 10 11 IRR 19.86% 16.80% NPV $3,103.39 $5,089.49 | 12 13 MIRR 16.65% 15.05% Payback period 3.00 3.21 =MIRR(B4:B9,13%,13%) =MIRR(C4:09,13%,13%) Years Years =3+3600/16800 MOOF WNL (18,000.00) $ (12,690.27) $ (7,991.39) $ (3,833.08) $ (153.17) $ 3.103.39 $ (54,000.00) (39,132.74) (25,975.88) (14,332.64) (4,028.88) 5,089.49 4.44 Years =4+4028.88/9118.37 Discounted Payback period 4.05 Years =4+153.17/3256.56 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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