Question

1A. Project L costs $35,000, its expected cash inflows are $9,000 per year for 8 years, and its WACC is 10%. What is the project's NPV? Round your answer to the nearest cent. Do not round your intermediate calculations.

1B.

Project L costs $46,724.57, its expected cash inflows are $9,000 per year for 11 years, and its WACC is 9%. What is the project's IRR? Round your answer to two decimal places.

1C.

Project L costs $65,000, its expected cash inflows are $10,000 per year for 8 years, and its WACC is 9%. What is the project's MIRR? Round your answer to two decimal places. Do not round your intermediate calculations.

1D.

Project L costs $40,000, its expected cash inflows are $12,000 per year for 7 years, and its WACC is 12%. What is the project's payback? Round your answer to two decimal places.

Answer 1

Answer 1A); Project L NPV is $ 13014.13

Answer 1B); Project L IRR is 15.20%

Answer 1C); Project L MIRR is 6.83%

Answer 1D); Project L Payback Period is 3.44 years and Discounted Payback Period is 4.64 years

YEAR 1 2 4 5 6 7 8 0 -35,000 3 9,000 Project L 9,000 9,000 9,000 9,000 9,000 9,000 9,000 WACC 10.0% 1 3 5 6 7 YEAR Discounting Factor 0 1.0000 2 0.8264 4 0.6830 8 0.4665 0.9091 0.7513 0.6209 0.5645 0.5132 Discounted Cash Flow Project L NPV 13,014.34 -35,000 8,182 7,438 6,762 6,147 5,588 5,080 4,618 4,199 YEAR 0 1 2 3 4 5 6 7 8 9 11 10 9,000 IRR 15.20% Project L -46,725 9,000 9,000 9,000 9,000 9,000 9,000 9,000 9,000 9,000 9,000 YEAR 0 1 2 3 4 6 7 8 5 10,000 MIRR 6.83% Project L -65,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 WACC 9.0% YEAR 0 1 2 3 5 6 7 4 12,000 Project L -40,000 12,000 12,000 12,000 12,000 12,000 12,000 12.0% WACC YEAR Discounting Factor 0 1 5 6 7 2 0.7972 3 0.7118 4 0.6355 1.0000 0.8929 0.5674 0.5066 0.4523 Discounted Cash Flow Project L -40,000 10,714 9,566 8,541 7,626 6,809 6,080 5,428 0 1 2 3 4 5 6 7 YEAR Cumulative Cash Flows Project L Discounted CumulativeCash Flow Project L -40,000 -28,000 -16,000 -4,000 8,000 20,000 32,000 44,000 -40,000 -29,286 -19,719 -11,178 -3,552 3,257 9,337 14,765 Years 3.44 12 12 12 5 PayBack Project L Discounted PayBack Project L 12 12 12 12 8 4.64

Computation of IRR: This can be computed using formula in Excel = IRR("range of cashflows", discounting factor%);

Computation of MIRR: This can be computed using formula in Excel = MIRR("range of cashflows", discounting factor%, reinvestment factor%); Here, both discounting factor % and reinvestment factor% are considered same.

Computation of Net Present Value (NPV) based on the Discounted Cash flows; The Discounting factor is computed based on the formula: For year 0, the discounting factor is 1; For Year 1, it is computed as = Year 0 factor /(1+discounting factor%) ; Year 2 = Year 1 factor/(1+discounting factor %) and so on;

Next, the cashflows need to be multiplied with the respective years' discounting factor, to arrive at the discounting cash flows;

The total of all the discounted cash flows is equal to its respective Project NPV of the Cash Flows;

Computation of Normal / Discounted Pay Back Period: Here, the period is computed for each project, based on cumulative normal /discounted cash flows: If the cumulative value is less than or equal to zero, the period is considered as 12 months (it means that the net cumulative cash flow has not yet paid back the initial investment); Once the value turns positive in a particular year, the period for such year is observed at a proportion of actual discounted cash flow to the cumulative CF; This gives the period less than 12 months in such year; Once this is computed, total of all the years is taken and divided by 12, to arrive at the Payback period in no.of years