Question

End-of-Chapter Problems - The Basics of Capital Budgeting 1 $15 $3 ject A aject B -$29 -$16 $13 $3 a. What are the projects' NPVs assuming the WACC is 5%? Round your answer to two decimal places. Do not round your intermediate calculations. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative value should be indicated by a minus sign Project A $ 2.00 million Project B $ 0.97 million What are the projects' NPVs assuming the WACC is 10%7 Round your answer to two decimal places. Do not round your intermediate calculations. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative value should be indicated by a minus sign. Project A $ million Project B $ million What are the projects' NPVs assuming the WACC is 15%? Round your answer to two decimal places. Do not round your intermediate calculations. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative value should be indicated by a minus sign. Project A $ million Project B $ million b. What are the projects' IRRs assuming the WACC is 5%? Round your answer to two decimal places. Do not round your intermediate calculations. Project A Project B What are the projects' IRRs assuming the WACC is 10%? Round your answer to two decimal places. Do not round your intermediate calculations Project A Project B What are the projects' IRRs assuming the WACC is 15%? Round your answer to two decimal places. Do not round your intermediate calculations. Project A Project B 96

Answer 1

a. When WACC = 5%

6 Project B WACC particular Yearo Year -1 year-2 year-3 0.05 project A -29 15 7. 8 9 10 owo 6 11 12 NPV ($0.33) ($0.48) 13 14. 15 16

WACC is 10% :-

project A 0.1 Project B -29 -16 6 7 8 9 10 WACC particular Yearo Year -1 year-2 year-3 11 NPV ($2.37) ($1.74) 13 14 15 16 17 18 19 20

WACC is 15%

0.15 project A Project B -29 5 WACC 6 particular 7 Yearo 8 Year -1 9 year-2 10 year-3 11 12 NPV 13 owo ($4.15) ($2.83) 14 15 16 17 18 19

b. For each value of WACC the IRR will remain the same.

0.05 project A -29 Project B 6 7. 8 9 10 WACC particular Yearo Year -1 year-2 year-3 a wooo 11 12 IRR 4.25% 3.30% 14 15 16 17 18 19

C. For any value of WACC non of the project is acceptable because both the project have lesser IRR than crossover rate and another thing is that both projects are having negative NPV so non of the project is acceptable. But if the choosing is mandatory so project A should be choose Because it has less negative NPV and more IRR as compared to project B.