Question

11.07

CAPITAL BUDGETING CRITERIA

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	-$6,000	$2,000	$2,000	$2,000	$2,000	$2,000
Project N	-$18,000	$5,600	$5,600	$5,600	$5,600	$5,600

1. 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

2. Assuming the projects are independent, which one(s) would you recommend?  
   -Select- A.Only Project M would be accepted because IRR(M) > IRR(N). B. Both projects would be rejected since both of their NPV's are negative. C. Only Project M would be accepted because NPV(M) > NPV(N). D. Only Project N would be accepted because NPV(N) > NPV(M). E. Both projects would be accepted since both of their NPV's are positive.
3. If the projects are mutually exclusive, which would you recommend?
   -Select- A. If the projects are mutually exclusive, the project with the highest positive IRR is chosen. Accept Project N. B. If the projects are mutually exclusive, the project with the highest positive NPV is chosen. Accept Project N. C. If the projects are mutually exclusive, the project with the highest positive IRR is chosen. Accept Project M. D. If the projects are mutually exclusive, the project with the highest positive MIRR is chosen. Accept Project M. E. If the projects are mutually exclusive, the project with the shortest Payback Period is chosen. Accept Project M.
4. Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRR?
   -Select- A. There is no conflict between NPV and IRR. B. The conflict between NPV and IRR occurs due to the difference in the size of the projects. C. The conflict between NPV and IRR is due to the relatively high discount rate. D. The conflict between NPV and IRR is due to the fact that the cash flows are in the form of an annuity. E. The conflict between NPV and IRR is due to the difference in the timing of the cash flows.

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

15:48 х a dx E ENG (14 01 2020 projects (Autusaved) (Autusaved) (Autusaved) - Excel plavin mandura I lelp O Tell me what you want to do A Share Tile Ilome Insert Page Layout Formulas Dala Review View Σ ΑtaSum- X Cut v11 b Wrap Text Calibri General A Copy- O Fill - Paste Conditional Farmat as Cell Insert Delete Format Sort & Find & = = = E = E Merge & Center BIU- - • Clear Format Painter Filter- Select Formatting - Table- Styles- Edeng Clipbcard Font Aignment Number Stvies Cels fr KE128 JU JV JW JX JY JZ KA KB KC KD KE KF KG 114 115 PROJECT N PV FACTOR AT PROJECT M PV OF CFAT 116 PROJECT N 13% PV OF CFAT PROJECT M year A*C B*C 117 118 -6000 -6000 -18000 -18000 119 2000 5600 0.8850 1769.91 4955.75 120 2 2000 5600 0.7831 1566.29 4385.62 0.6931 121 2000 5600 1386.10 3881.08 1226.64 3434.58 122 4 2000 5600 0.6133 123 2000 5600 0.5428 1085.52 3039,46 1696.50 124 NPV = 1034.46 a 125 16.80% <---[=IRR(JY118:JY123)] 126 19.86% IRR = 127 128 15.05% <---- (=MIRR(JY118:JY123,14%,14%)] MIRR = 16.65% 129 PAYBACK PERIOD = 3.00 YEARS 130 3.21 YEARS [AS CASH FLOWS ARE EQUAL] 6000/2000 18000/5600 (INVESTMENT/ANNUAL CFAT) 131 132 133 ... RATIO PI PBP ARR invest, EAA MI-np-Ir REPLACEMENI S HPR GMAM | EAC MACKS NPV RELEVANT BETA LEVERED REPLACEMENI BOND| OPTION IO WAII| STEIN indiffEPS EBI . E + 130% Ready circuar References: Pa00

15:48 х a dx E ENG (14 01 2020 projects (Autusaved) (Autusaved) (Autusaved) - Excel plavin mandura I lelp O Tell me what you want to do A Share Tile Home Insert Page Layuut Formulas Dala Review View Σ ΑtaSum- X Cut v11 b Wrap Text Calibri General a Copy - 4 Fill - Paste Conditional Farmat as Cell Insert Delete Format Sort & Find & = = = E = E Merge & Center BIU- - • Clear Format Painter Formatting- Table- Styles Filter- Select Clipbcard Fort Aignment Number Styies Cels Edrng KE168 JU JV JW JX JY JZ KA KB KC KD KE KF KG 148 149 150 CCFAT PV FACTOR AT PROJECT M PROJECT N CCFAT PROJECT M FOR M FOR N 151 PROJECT N 13% PV OF CFAT PV OF CFAT year 152 A*C B*C -6000 -18000 153 -6000 -18000 -18000 -6000 154 5600 -13044.25 2000 0.8850 1769.91 4955.75 -4230.09 155 1566.29 2000 5600 0.7831 4385.62 -2663.80 -8658.63 156 5600 3 2000 0.6931 1386.10 3881.08 -1277.69 -4777.55 -1342.96 157 4 2000 5600 0.6133 1226.64 3434.58 -51.06 158 2000 5600 0.5428 1085.52 3039.46 1034.46 1696.50 159 DISCOUNTED PAYBACK PERIOD 160 4 YEARS + CCFAT4/CFAT5 (IGNORE NEGATIVE SIGN OF CCFAT4) 161 FOR M 4 YEARS + (51.06/1085.52) 162 163 4.05 YEARS 164 4 YEARS + CCFAT4/CFAT5 (IGNORE NEGATIVE SIGN OF CCFAT4) 165 FOR N 4 YEARS + (1342.96/3039.46) 166 167 4.44 YEARS 168 RATIO PI PBP ARR invest, EAA MI-np-ir REPLACEMENT S HPR GMAM | EAC MACKS NPV RELEVANI REPLACEMENI BOND OPION IO WAIT STEIN indiffEPS EBI ... BETA LEVERED REPLACEMENI S EAC MACRS + 130% Ready Circuar References: Pa00

FOR b : E :

FOR c : B

FOR d : B

15:48 х a x ENG (14 01 2020 projects (Autusaved) (Autusaved) (Autusaved) - Excel pravin mandura I lelp O Tell me what you want to do A Share Tile Home Insert Page Layout Formulas Dala Review View X Cut Σ AitaSum - v11 b Wrap Text Calibri General a Copy - O Fill - Paste Conditional Farmat as Cell Insert Delete Format Sart & Find & E E EMerge & Center BIU- Format Painter - • Clear Formatting- Table- Styles Filter- Select- Clipbcard Font Aignmert Number Stvies Cels Edrng fr JX147 JZ JU JV JW JX JY KA KB KC KD KE KF KG 132 133 134 Both projects would be accepted since both of their NPV's are positive 135 BOTH M & N 136 137 If the projects are mutually exclusive, the project with the highest positive NPV is chosen. Accept Project N 138 PROJECT N 139 140 The conflict between NPV and IRR occurs due to the difference in the size of the projects. 141 142 143 144 145 146 147 148 149 150 151 152 ... RATIO PI PBP ARR invest, EAA MI-np-Ir REPLACEMENI S HPR GMAM | EAC MACKS NPV RELEVANT REPLACEMENI STEIN indiffePS EBI BETA LEVERED OPION 1O WAIT STEIN indiff:PS EBI . E BOND circuar References: KSIJ0 + 130% Readr