Question
Please incluse formulas along woth work process, I am trygin to understadn, not just find answers. Thanks!
Intermediate Problems 7-13 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: 11-7 0 4 Project M $30,000 $10,000 $10,000 $10,000 $10,000 $10,000 Project N$90,000 $28,000 $28,000 $28,000 $28,000 $28,000 a. Calculate NPV, IRR, MIRR, payback, and discounted payback for each project. b. Assuming the projects are independent, which one(s) would you recommend?
Explanation / Answer
a) Based on below excel table first part of question is given.
b) If independent projects then both projects can be selected if NPV of both projects are greater than 0. Based on calculations below both projects can be selected as NPV is greater than 0
c) If mutually exclusive project then company has the option of selecting only one option . The option with higher NPV is selected Hence project n will be selected.
4. NPV and IRR yield different results because for NPV calculation discounting is done at WACC which is less than IRR. Whereas IRR is the rate at which NPV is 0. So we get different results.
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A B C D E F 1 Year 0 1 2 3 4 5 2 Project M -30,000 10,000 10,000 10,000 10,000 10,000 3 WACC 14% NPV is the present value of all future cah flows minus initial investment 4 NPV 4,330.81 NPV(A3,B2:F2)+A2 (initial investment= -30,000 5 IRR 19.86% IRR(A2:F2) IRR is the discount rate at which the NPV = 0 Cash Flow -30000.00 10000.00 10000.00 10000.00 10000.00 10000.00 Cumulative Cash flows = Cumulative Cash flows of previous year + Cash flows of present Year -30000.00 -20000.00 -10000.00 0.00 10000.00 20000.00 Payback period = Year at which cumulative cash flow =0 So Payback period = 3 years Discounted Cash flows = Present value of Cash flows= Cash flow/(1 +WACC)^t -30000.00 8771.93 7694.68 6749.72 5920.80 5193.69 Cumulative Discountyed Cash flows = Cumulative Cash flows of previous year + Cash flows of present Year -30000.00 -21228.07 -13533.39 -6783.68 -862.88 4330.81 Discounted Payback Period = Period at which neagtive cash flow converts to positive cash flow + cumulative discounted cash flow at year 4/Cash flow at year 5 4.17 MIRR = (Future value of cash inflow/PV of cash outflow)^1/n 117.12% A B C D E F 1 Year 0 1 2 3 4 5 2 Project N -90,000 28000 28000 28,000 28,000 28,000 3 WACC 14% NPV is the present value of all future cah flows minus initial investment 4 NPV 6,126.27 NPV(A3,B2:F2)+A2 (initial investment= -30,000 5 IRR 16.80% IRR(A2:F2) IRR is the discount rate at which the NPV = 0 Cash Flow -90000.00 28000.00 28000.00 28000.00 28000.00 28000.00 Cumulative Cash flows = Cumulative Cash flows of previous year + Cash flows of present Year -90000.00 -62000.00 -34000.00 -6000.00 22000.00 50000.00 Payback period = Year at which cumulative cash flow =0 So Payback period = 3 years Discounted Cash flows = Present value of Cash flows= Cash flow/(1 +WACC)^t -90000.00 24561.40 21545.09 18899.20 16578.25 14542.32 Cumulative Discountyed Cash flows = Cumulative Cash flows of previous year + Cash flows of present Year -90000.00 -65438.60 -43893.51 -24994.30 -8416.06 6126.27 Discounted Payback Period = Period at which neagtive cash flow converts to positive cash flow + cumulative discounted cash flow at year 4/Cash flow at year 5 4.58 MIRR = (Future value of cash inflow/PV of cash outflow)^1/n 105.74%