Problem 11-7 Capital budgeting criteria A firm with a 13% WACC is evaluating two

Question

Problem 11-7
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

0 1 2 3 4 5

Explanation / Answer

Calculate NPV for each project. Round your answers to the nearest cent.

Project A

NPV = -21000 + 7000/1.13 + 7000/1.13^2 + 7000/1.13^3 + 7000/1.13^4 + 7000/1.13^5

NPV = $ 3620.62

Project B

NPV = -63000 + 19600/1.13 + 19600/1.13^2 + 19600/1.13^3 + 19600/1.13^4 + 19600/1.13^5

NPV = $ 5937.73

Project A    $ 3620.62
Project B    $ 5937.73

Calculate IRR for each project. Round your answers to two decimal places.

Using Excel Formula

Project A

IRR = irr(values)

IRR = irr({-21000,7000,7000,7000,7000,7000})

IRR = 19.86%

Project B

IRR = irr(values)

IRR = irr({-63000,19600,19600,19600,19600,19600})

IRR = 16.80%

Project A 19.86 %
Project B 16.80 %

Calculate MIRR for each project. Round your answers to two decimal places.

Using Excel Formula

Project A

MIRR = mirr(values,finance rate, reinvest rate)

MIRR = mirr({-21000,7000,7000,7000,7000,7000},13%,13%)

MIRR = 16.65%

Project B

MIRR =mirr(values,finance rate, reinvest rate)

MIRR = mirr({-63000,19600,19600,19600,19600,19600},13%,13%)

MIRR = 15.05%

Project A 16.65 %
Project B 15.05 %

Calculate payback for each project. Round your answers to two decimal places.

Project A

Payback period = Initial Investment/Annual Cash Flow

Payback period = 21000/7000

Payback period = 3 years

Project B

Payback period = Initial Investment/Annual Cash Flow

Payback period = 63000/19600

Payback period = 3.21 years

Project A 3 years
Project B 3.21 years

Calculate discounted payback for each project. Round your answers to two decimal places.

Project A

Discounted Payback period = 4 + 178.70/3799.32

Discounted Payback period = 4.05 years

Project B

Discounted Payback period = 4 + 4700.36/10638.09

Discounted Payback period = 4.44 years

Project A 4.05 years
Project B 4.44 years

Project A Project B Cash Flow PV Cummulative of PV Cash Flow PV Cummulative of PV 0 -21000 - 21,000.00 -21000.00 -63000 - 63,000.00 -63000.00 1 7000      6,194.69 -14805.31 19600    17,345.13 -45654.87 2 7000      5,482.03 -9323.28 19600    15,349.67 -30305.19 3 7000      4,851.35 -4471.93 19600    13,583.78 -16721.41 4 7000      4,293.23 -178.70 19600    12,021.05 -4700.36 5 7000      3,799.32 3620.62 19600    10,638.09 5937.73

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