The director of capital budgeting for a firm has identified two mutually exclusi
ID: 2678383 • Letter: T
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 ($100) ($100)
1 70 10
2 50 60
3 20 80
Both of the projects have a cost of capital of 14 percent.
(i) What is the regular payback period (in years) for Project B?
Regular (non-discounted) Payback Period for B = ____________________.
(ii) What is Project A's net present value (NPV)?
NPV for A = ____________________.
(iii) What is the profitability index (PI) for Project B?
Profitability Index for B = ____________________.
(iv) What is the modified internal rate of return for Project A?
MIRR for Project A = ____________________.
Explanation / Answer
i) Regular payback period of B = 2 + (100 - 10 - 60)/80 = 2.375 years ii) NPV of A = -100 + 70/1.14 + 50/1.14^2 + 20/1.14^3 = $ 13.37 iii) PI of B = NPV of B/Initial Investment = 8.9377/100 = 0.089377 iv) Since there is no other outflow of cash in A other than initial investment, therefore MIRR = IRR of A IRR A = 23.5641%... :D