Question

NPV

Your division is considering two projects with the following cash flows (in millions):

0

1

2

3

Project A	-$27	$13	$17	$8
Project B	-$25	$14	$11	$2

1. 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    $   million
   Project B    $   million

   What are the projects' NPVs assuming the WACC is 10%? 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

2. 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   %

3. If the WACC was 5% and A and B were mutually exclusive, which project would you choose? (Hint: The crossover rate is 90.37%.)  
   -Select-Project A Project B Neither A, nor B

   If the WACC was 10% and A and B were mutually exclusive, which project would you choose? (Hint: The crossover rate is 90.37%.)  
   -Select-Project A Project B Neither A, nor B

   If the WACC was 15% and A and B were mutually exclusive, which project would you choose? (Hint: The crossover rate is 90.37%.)  
   -Select-Project A Project B Neither A, nor B

Answer 1

The project, which has higher NPV would add higher value to the firm and hence should be selected if the projects are mutually exclusive.

AB Year Cash Flow (Project) Cash Flow (Project) ($27) ($25) $13 $14 $11 $8 $2 $17 N w 7 a) WACC NPV 5% $7.71 $0.04 10 11 WACC NPV 10% $4.88 ($1.68) WACC NPV 15% $2.42 ($3.19) b) 16 17 WACC IRR 5% 20.67% 5.10% 19 WACC IRR 10% 20.67% 5.10% 21 WACC IRR 15% 20.67% 5.10% 5% 25 c) 26 27 WACC Choose Project A 10% WACC Choose Project A 15% WACC Choose Project A

B Year Cash Flow (Project) Cash Flow (Project) -27 -25 Hamro N 17 8 WACC NPV 0.05 =NPV($C7,C$3:C$5)+C$2 =NPV($C7,D$3:D$5)+D$2 WACC NPV 0.1 =NPV($C10,C$3:C$5)+C$2 =NPV($C10,D$3:D$5)+D$2 EAM WACC NPV 0.15 =NPV($C13,C$3:C$5)+C$2 =NPV($C13,D$3:D$5)+D$2 16 b) WACC 0.05 =IRR(C$2:C$5) IRR =IRR(D$2:D$5) 20 WACC IRR 0.1 =IRR(C$2:C$5) =IRR(D$2:D$5) WACC 0.15 =IRR(C$2:C$5) IRR =IRR(D$2:D$5) WACC 0.05 Project A Choose WACC Choose 0.1 Project A WACC Choose 0.15 Project A