The director of capital budgeting for a firm has identified two mutually exclusi

Question

The director of capital budgeting for a firm has identified two mutually exclusive projects, A and B, with the following expected net cash flows: Expected Net Cash Flows Year Project A Project B 0 ($120) ($120) 1 80 20 2 60 70 3 30 90 Both of the projects have a cost of capital of 14 percent. (i) What is Project A's and Project Bs net present value (NPV)? (4 points) NPV for A = ____________________. NPV for B = ____________________. (ii) What is the profitability index (PI) for Project B? (3 points) Profitability Index for B = ____________________. (iii) What is the modified internal rate of return for Project A? (3 points) MIRR for Project A = ____________________.

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Part A: NPV

NPV = -Initial Investment + Present Value of Cash Inflows

NPV (Project A) = -120 + 80/(1+.14)^1 + 60/(1+.14)^2 + 30/(1+.14)^3 = $16.592 or $16.59

NPV (Project B) = -120 + 20/(1+.14)^1 + 70/(1+.14)^2 + 90/(1+.14)^3 = $12.154 or $12.15

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Part B: Profitability Index

Profitability Index = Present Value of Cash Inflows/Initial Investment

Present Value of Cash Inflows (Project B) = 20/(1+.14)^1 + 70/(1+.14)^2 + 90/(1+.14)^3 = 132.154

Profitablity Index (Project B) = 132.154/120 = 1.101 or 1.10

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Part C: MIRR

MIRR = (Cash Flows/Values,finance_rate,reinvest_rate)

MIRR (Project A) = (-120,80,60,30,0,14%) = 19.029% or 19.03%

Thanks.

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