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

ID: 2652623 • Letter: P

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

Assuming the projects are independent, which one or ones would you recommend?

If the projects are mutually exclusive, which would you recommend?

Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRR?

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NPV= Cash Inflows- Cash Outflows

Project A= 10000*3.51-30000= $5100

Project B=28000*3.51-90000= $8280

IRR= Lower rate+ NPV at lower rate/ NPV at lower rate-NPV at higher rate* (Higher Rate-Lower Rate)

Project A @20$ = 10000*2.99-30000=-$100

IRR= 5100+5100/5100+100*(20-13)

IRR= 19.86

Project B= 29..*28000-90000= -$6280

IRR= 13+8280/8280+6280*(20-130

IRR= 16.98%

Payback Period

Project A= 30000-10000*3 = 3 years

Project B= 3+6000/28000 = 3.21 Years

Discounted Payback period

Project A = 4+300/5400 = 4.05 Years

Project B = 4.8 years Approximately

Project A should be selected due to higher Net Present Value and lower Discounted Payback Period