Capital budgeting criteria A firm with a 13% WACC is evaluating two projects for
ID: 2648978 • Letter: C
Question
Capital budgeting criteria
A firm with a 13% WACC is evaluating two projects for this year's capital budget. After-tax cash flows, including depreciation, are as follows:
Calculate NPV for each project. Round your answers to the nearest cent.
Project A $
Project B $
Calculate IRR for each project. Round your answers to two decimal places.
Project A %
Project B %
Calculate MIRR for each project. Round your answers to two decimal places.
Project A %
Project B %
Calculate payback for each project. Round your answers to two decimal places.
Project A years
Project B years
Calculate discounted payback for each project. Round your answers to two decimal places.
Project A years
Project B years
Explanation / Answer
Calculation of NPV
NPV=cash inflows-cash outflows
Project A =2000(PV5years @ 13%)-6000
=2000((1/1.13)1+(1/1.13)2+(1/1.13)3+(1/1.13)4+(1/1.13)5)-6000
=2000*3.52-6000
=7034-6000=1034
Project B =5600(PV5years @ 13%)-18000
=5600((1/1.13)1+(1/1.13)2+(1/1.13)3+(1/1.13)4+(1/1.13)5)186000
=5600*3.52-18000
=(80)
Calculation of Internal rate of return
IRR is the rate at which NPV is 0
0=2000(Pv5years, )-6000
Internal Rate of Return for Project A is 20%
Project B
0=5600(PV5years)-18000
Internal rate of Return for Project B is approximately 17%
Payback Period
Project A=6000/2000=3years
Project B=18000/5600= 3.21 years
Discounted Payback Period 1770+1566+1386+1226
Project A is approximately 4 years
Project B is after 5 years as the net NPV is negative.