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Q Search this course CENGAGE MINDTAP OX Ch 11: End-of-Chapter Problems - The Basics of Capital Budgeting 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 Project M Project N $21,000 $7,000 $7,000 $7,000 $7,000 $7,000 - $63,000 $19,600 $19,600 $19,600 $19,600 $19,600 a. Calculate NPV for each project. Round your answers to the nearest cent. Do not round your intermediate calculations. Project M 5 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 dback Calculate payback for each project. Round your answers to two decimal places. Do not round your intermediate calculations. Project M Project N Calculate discounted payback for each project. Round your answers to two decim es. Do not round your intermediate calculations. Project M Project N b. Assuming the projects are independent, which one's) would you recommend? Years TERM c. If the projects are mutually exclusive, which would you recommend? tlve Easing d. Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRUR? MacBook Pro

Answer 1

NPV, IRR & MIRR

fix =MIRR (B3: G3, $B$1,$B$1) X В15 В C D E F G WACC 0.14 1 2 Year 0 1 2 3 4 5. l-21000 Project M Project N 7000 7000 7000 7000 7000 3 -63000 19600 19600 19600 19600 19600 5 NPV -NPV($B$1,C3:G3)+B3 NPV($B$1,C4:G4)+B4 7 Project M Project N 8 9 IRR 10 =IRR(B3:G3) =IRR(B4:G4) Project M 11 12 Project N 13 MIRR 14 MIRR (B3:G3,$B$1,$B$1) =MIRR (B4: G4, $ B$1,$B$1) 15 Project M 16 Project N

fir MIRR (B3:G3,$B$1,$B$1) B15 A В C D E G WACC 14% 1 Year 0 2 3 4 5 2 Project M 7000 7000 -21000 7000 7000 7000 3 -63000 Project N 19600 19600 19600 19600 19600 4 5 NPV 6 Project M Project N 3031.57 7 4288.39 IRR Project M 12 Project N 10 19.86% 11 16.80% 13 MIRR 15 Project M Project N 14 17.12% 15.51% 16 LL Lu X

Payback Period

fix -A7+ -E6/D7 X D9 A В C D E WACC 0.14 Cumulative Cash Flow for Project M Project N -63000 Cumulative Cash Flow for Project N Year Project M 2 -21000 -ВЗ -D3 1 7000 -С3+B4 19600 -ЕЗ+D4 4 2 7000 =C4+B5 19600 =E4+D5 5 |-E5+D6 7000 -С5+B6 19600 Б - E6+D7 19600 7000 4 -Сб+B7 7 5 7000 -С7+B8 19600 =E7+D8 8 A7+E6/D7 9 Payback Period -Аб+-Сб/В6

X =A7+-E6/D7 D9 В C E WACC 14% Year Project M Cumulative Cash Flow 1 Project N Cumulative Cash Flow for Project N 0 -21000 -21000 -63000 -63000 3 1 7000 -14000 19600 -43400 4 2 7000 -7000 19600 -23800 5 3 7000 0 19600 -4200 6 7000 14000 19600 15400 4 7000 7 35000 7000 19600 9 Payback Period 3 4.21

Discounted Payback Period

X =A7+-G7/F8 E9 A В D WACC 0.14 1 Cumulative Discounted Cash Flow for Project M Project N Discounted Cash Flows Cumulative Cash Flow for Project N Project M Discounted Cash Flows 2 Year -B3/(1+$B$1)A$A3 -B4/(1+$B$1)A$A4 -B5/(1+$B$1)A$A5 B6/(1+$B$1)A$A6 -B7/(1+$B$1)A$A7 B8/(1+$B$1)^$A8 -E3/(1+$B$1)A$A3 =E4/(1+$B$1)A$A4 -E5/(1+$B$1)A$A5 E6/(1+$B$ 1)A$A6 |=E7/(1+$B$1)^$A7 -E8/(1+$B$1)^$A8 =-63000 3 0 -21000 ЕСЗ =F3 4 1 7000 -D3+C4 19600 -G3+F4 19600 5 2 7000 -D4+C5 -G4+F5 -G5+ F6 6 3 7000 -D5+C6 19600 |=G6+F7 4 |7000 7 D6+C7 19600 8 5 |-G7+F8 7000 D7+C8 19600 9 Payback Period -A7+-D7/C7 =A7+-G7/F8

A9 Discounted Payback Period В C E G WACC 14% Project M Discounted Cash Flows Cumulative Discounted Cash Flow for Project M Project N Discounted Cash Flows Cumulative Cash Flow for Project N 2 Year 0 -21000 -21000.00 -21000.00 -63000 -63000.00 -63000.00 -45807.02 4 1 7000 6140.35 -14859.65 19600 17192.98 2 7000 5386.27 9473.38 19600 15081.56 -30725.45 13229.44 6 7000 4724.80 -4748.58 19600 -17496.01 7 4 7000 4144.56 -604.01 19600 11604.77 -5891.24 19600 4288.39 5 7000 3635.58 3031.57 10179.63 9 Discounted Payback Period 4.15 4.58

The sign change in the cumulative cash flow shows that the payback is achieved in that year. For example if sign change happens in year 3 it means that payback is achieved in the third year; i.e after the second and before the completion of the 3rd year. The amount needed to be earned for the payback to happen in the 3rd year is equal to the outstanding amount.(negative figure in the cumulative cash flow column for year 2). Hence the ratio of time taken to earn that amount in year 3 is added to 2, since 2 years have been completed.

b.

As NPV for both the projects is positive if the projects are independent both would be selected.

c.

If they are mutually exclusive projects, Project N would be selected.

d.

The conflicting results are seen because of the size of the investments. Project N has a higher investment than M hence this conflicting results are seen. The cash flow to initial investment ratio is also higher for Project M.