Question

Problem 10-21
Payback, NPV, and MIRR

Your division is considering two investment projects, each of which requires an up-front expenditure of $22 million. You estimate that the cost of capital is 12% and that the investments will produce the following after-tax cash flows (in millions of dollars):

Year	Project A	Project B
1	5	20
2	10	10
3	15	8
4	20	6

1. What is the regular payback period for each of the projects? Round your answers to two decimal places.
   
   Project A  years
   
   Project B  years
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5. What is the discounted payback period for each of the projects? Round your answers to two decimal places.
   
   Project A  years
   
   Project B  years
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7. 
   
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9. If the two projects are independent and the cost of capital is 12%, which project or projects should the firm undertake?
   -Select-Project AProject BBoth projectsItem 5
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13. If the two projects are mutually exclusive and the cost of capital is 5%, which project should the firm undertake?
    -Select-Project AProject BItem 6
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17. If the two projects are mutually exclusive and the cost of capital is 15%, which project should the firm undertake?
    -Select-Project AProject BItem 7
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20. 
    
21. What is the crossover rate? Round your answer to two decimal places.
    %
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25. If the cost of capital is 12%, what is the modified IRR (MIRR) of each project? Round your answers to two decimal places.
    
    Project A  %
    
    Project B  %

Answer 1

a. Payback Period Year Cash inflow of Cash inflow Project A of Project B co a 22 Project A 1 Invesment amount= 2 inflow from 1 to 2= 3 Balance recovered from Year 3(1-2) 4 Payback Period(2+7/15) 2.47 Years Project B Project B payback period is 1 year as entire amount recovered in year 1

e. Discount Payback Period@12% Year Cash inflow of Project A 4.46 7.97 10.68 12.71 Project A 1 Invesment amount= 2 inflow from 1 to 2= 3 Balance recovered from Year 3(1-2) 4 Payback Period(2+9.56/10.68) 22 12.44 9.56 2.90 Years Year Cash inflow of Project B 17.86 7.97 5.69 3.81

Year Cash inflow of Project B 17.86 7.97 5.69 3.81 Project B 1 Invesment amount= 2 inflow from 0 to 1= 3 Balance recovered from Year2(1-2) 4 Payback Period(1+4.14/7.97) 22 17.86 4.14 1.52 Years

i.Cost of capital is 12% Project A Year Cash inflow Present Annuity factor@12% un Present Value AB 1.000 -22.00 0.893 4.46 10 0.797 7.97 0.712 10.68 0.636 12.71 Net Present Value 13.82 Project B Year Cash inflow Present Annuity factor@12% Present Value A*B 1.000 -22.00 0.893 17.86 0.797 7.97 0.712 5.69 0.636 3.81 Net Present Value 13.34 Conclusion: Project A Should be adopt as it gives more NPV 000

Year m.Cost of capital is 5% Project A Cash inflow Present Annuity factor@5% Present Value A*B 1.000 -22.00 0.952 4.76 0.907 9.07 0.864 12.96 0.823 16.45 Net Present Value 21.24 Project B Cash inflow Present Annuity factor@5% Present Value A*B 1.000 -22.00 0.952 19.05 0.907 9.07 0.864 6.91 0.823 4.94 Net Present Value 17.96 Conclusion: Project A Should be adopt as it gives more NPV Year acor

Year 20 q.Cost of capital is 15% Project A Cash inflow Present Annuity factor@1 5% Present Value AB 1.000 -22.00 0.870 4.35 0.756 7.56 0.658 9.86 0.572 11.44 Net Present Value 11.21 Project B Year Cash inflow Present Annuity factor@1 Present Value BA*B 1.000 -22.00 0.870 17.39 101 0.756 7.56 8 0.658 5.26 6 0.572 3.43 Net Present Value Conclusion: Project B Should be adopt as it gives more NPV

u. Cross Over Rate Year Cash inflow of Cash inflow of Project A Project B NET Flows A-B u. Cross Over Rate IRR formula IRR(D28:D32) IRR= 13.53%

y.Modified IRR Year Cash inflow of Cash inflow of Project A Project B N co w a Cost of capital 12% Projec A MIRR formula= MIRR(B43:B47,C49,C49) Projec B MIRR formula= MIRR(C43:C47,C49,C49) MIRR= 26.52% MIRR= 26.09%