Please include the formulas used to reach these answers. I am trying to understa
ID: 2619878 • Letter: P
Question
Please include the formulas used to reach these answers. I am trying to understand the process, not just have the asnwer. Thank you
11-3 11-4 11-5 11-6 M?RR Refer to problem 11-1. What is the project's MIRR? PAYBACK PERIOD Refer to problem 11-1. What is the project's payback? DISCOUNTED PAYBACK Refer to problem 11-1. What is the project's discounted payback? NPV Your division is considering two projects with the following cash flows (in millions) 0 Project A Project B -$25 -$20 $5 $10 $10 $9 $17 $6 a. What are the projects' NPVs assuming the WACC is 5%710%215%? b. What are the projects' IRRs at each of these WACCs? C. If the WACC was 5% and A and B were mutually exclusive, which project would you choose? What if the WACC was 10%? 15%? (Hint: The crossover rate is 7.81%.) 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: diate ns 11-7 4 Project M $30,000 $10,000 $10,000 $10,000 $10,000 $10,000Explanation / Answer
11-6
a.
Project A
Project A
NPV @ 5 %
$ 3.52
$ 2.87
NPV @ 10 %
$ 0.58
$ 1.04
NPV @ 15 %
$ (1.91)
$ (0.55)
b.
Project A
Project A
IRR
11.10%
13.18%
c.
WACC of below cross over rate i.e. 5 %, Project A should be selected as NPV is higher for Project A than Project B at 5 %.
For WACC of higher cross over rate i.e. 10 % and 15 %, Project B should be selected as NPVs of Project B is higher than Project A.
Explanation:
Formula for NPV = C1/ (1+r) + C2/ (1+r) 2 + C3/ (1+r) 3 +…. Cn (1+r) n – Investment
Where Cn = Cash flow in year n and r = cost of capital
NPV can be easily computed in a tabular format as:
Year
Cash Flow
Project A (CA)
Cash Flow
Project B (CB)
PV Factor Calculation
PV Factor @ 5 % (F)
PVA(= CA x F)
PVA (= CB x F)
0
$ (25)
$ (20)
1/(1.05)^0
1
$ (25.00000)
$ (20.00000)
1
$ 5
$ 10
1/(1.05)^1
0.952380952
$ 4.76190476
$ 9.52380952
2
$ 10
$ 9
1/(1.05)^2
0.907029478
$ 9.07029478
$ 8.16326531
3
$ 17
$ 6
1/(1.05)^3
0.863837599
$ 14.68523918
$ 5.18302559
NPV
$ 3.51743872
$ 2.87010042
Year
Cash Flow
Project A (CA)
Cash Flow
Project B (CB)
PV Factor Calculation
PV Factor @ 10% (F)
PVA (= CA x F)
PVB (= CB x F)
0
$ (25)
$ (20)
1/(1.1)^0
1
$ (25.00000)
$ (20.00000)
1
$ 5
$ 10
1/(1.1)^1
0.909090909
$ 4.54545
$ 9.09091
2
$ 10
$ 9
1/(1.1)^2
0.826446281
$ 8.26446
$ 7.43802
3
$ 17
$ 6
1/(1.1)^3
0.751314801
$ 12.77235
$ 4.50789
NPV
$ 0.58227
$ 1.03681
Year
Cash Flow
Project A (CA)
Cash Flow
Project B (CB)
PV Factor Calculation
PV Factor @ 15 % (F)
PV (= CA x F)
PV (= CB x F)
0
$ (25)
$ (20)
1/(1.15)^0
1
$ (25.00000)
$ (20.00000)
1
$ 5
$ 10
1/(1.15)^1
0.869565217
$ 4.34783
$ 8.69565
2
$ 10
$ 9
1/(1.15)^2
0.756143667
$ 7.56144
$ 6.80529
3
$ 17
$ 6
1/(1.15)^3
0.657516232
$ 11.17778
$ 3.94510
NPV
$ (1.91296)
$ (0.55396)
Computation of IRR:
A
B
C
D
1
Year
Cash Flow
Project A (CA)
Cash Flow
Project B (CB)
2
0
$ (25)
$ (20)
3
1
$ 5
$ 10
4
2
$ 10
$ 9
5
3
$ 17
$ 6
6
IRR
11.10%
13.18%
Excel Formula for IRR Project A “= IRR(C2: C5)”
Excel Formula for IRR Project B “= IRR(D2: D5)”
****Answer for 11-6, as there is no data for 11-3,11-4,11-5 and there is no question for given data for 11-7.
Project A
Project A
NPV @ 5 %
$ 3.52
$ 2.87
NPV @ 10 %
$ 0.58
$ 1.04
NPV @ 15 %
$ (1.91)
$ (0.55)