Question

budgeting criteria 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 Project 6 -$300 $405 -$387 $131 -$193 $131 -$100 $131 $600 $131 $600 $131 $850 $131 -$180 $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. HH Open spreadsheet a. What is each project's NPV? Round your answer to the nearest cent. Do not round your intermediate calculations Project A: $ Project : $ b. What is each project's IRA? Round your answer to two decimal places. Project A: Project B: 90 c. 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: 9 d. From your answers to parts a c, which project would be selected? If the WACC was 18%, which project would be selected?

Answer 1

Solution:-

To Calculate NPV of the Project-

E F G L H Net Present Value of Project B Year А B С D 1 Net Present Value of Project A 2 3 Year Cash flow Discounting Factor @11% Present Value 4 0 -300 1.00 -300 5 1 -387 0.901 -348.65 6 2 -193 0.812 -156.64 7 3 -100 0.731 -73.12 8 4 600 0.659 395.24 0 Cash flow Discounting Factor @11% Present Value -405 1.00 -405 131 0.901 118.02 131 0.812 106.32 1 2 3 131 0.731 95.79 4 131 0.659 86.29 77.74 9 5 600 0.593 5 131 0.593 10 6 850 0.535 356.07 454.44 -86.70 6 131 0.535 70.04 11 7 -180 0.482 7 0 0.482 0.00 12 13 Net Present Value 240.64 Net Present Value 149.20 14

А D E F H B Net Present Value of Project A (Formula Sheet) G Net Present Value of Project B (Formula Sheet) 1 2 3 Year Year Cash flow -300 4 0 0 1 2 5 1 62 73 8 4 95 10 6 -387 -193 -100 600 Discounting Factor @11% =1 =C4*100/111 =C5*100/111 =C6*100/111 =C7*100/111 =C8*100/111 =C9*100/111 =C10*100/111 Present Value =B4*C4 =B5*C5 =B6 C6 =B7*C7 =B8C8 =B9*C9 =B10*C10 =B11*c11 3 Cash flow -405 131 131 131 131 131 131 0 Discounting Factor @11% =1 =H4*100/111 =H5*100/111 =H6*100/111 =H7*100/111 =H8*100/111 =H9*100/111 =H10*100/111 Present Value =G4*H4 =G5*H5 =G6*H6 =G7*H7 =G8*H8 =G9*H9 =G10*H10 =G11*H11 4 600 5 850 6 7 11 7 - 180 12 Net Present Value =SUM(D4:011) Net Present Value =SUM(14:111) 13 14

To Calculate IRR of the Project-

с D E F A B IRR of Project A 1 IRR of Project B 2 3 Year Year Cash flow -405 st 0 0 Cash flow -300 -387 -193 5 1 1 131 6 2 2 131 7 3 -100 3 131 vo 4 600 4 131 9 5 600 5 131 10 6 850 6 131 11 7 -180 7 0 12 13 IRR 18.10% IRR 23.01% 14 15 Formula IRR(B4:B11) Formula IRR(E4:E11) 16

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