Capital budgeting criteria A firm with a 13% WACC is evaluating two projects for
ID: 2713933 • 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:
0 1 2 3 4 5
Project A -$12,000 $4,000 $4,000 $4,000 $4,000 $4,000
Project B -$36,000 $11,200 $11,200 $11,200 $11,200 $11,200
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?
-Select-
Only Project B would be accepted because NPV(B) > NPV(A).
Both projects would be accepted since both of their NPV's are positive.
Only Project A would be accepted because IRR(A) > IRR(B).
Both projects would be rejected since both of their NPV's are negative.
Only Project A would be accepted because NPV(A) > NPV(B).
Item 11
If the projects are mutually exclusive, which would you recommend?
-Select-
If the projects are mutually exclusive, the project with the highest positive IRR is chosen. Accept Project A.
If the projects are mutually exclusive, the project with the highest positive MIRR is chosen. Accept Project A.
If the projects are mutually exclusive, the project with the shortest Payback Period is chosen. Accept Project A.
If the projects are mutually exclusive, the project with the highest positive IRR is chosen. Accept Project B.
If the projects are mutually exclusive, the project with the highest positive NPV is chosen. Accept Project B.
Item 12
Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRR?
-Select-
The conflict between NPV and IRR is due to the relatively high discount rate.
The conflict between NPV and IRR is due to the fact that the cash flows are in the form of an annuity.
The conflict between NPV and IRR is due to the difference in the timing of the cash flows.
There is no conflict between NPV and IRR.
The conflict between NPV and IRR occurs due to the difference in the size of the projects.
Item 13
Explanation / Answer
1.
Compute the NPV of both the projects.
A = $12,000 - $4,000 * 3.517 = $2,068.925.
B = $36,000 - $11,200 * 3.517 = $3,393.
Project B is better as its Npv is more than project A.
2.
Compute IRR of the project.
By using excel function,
A = IRR(-12000,4000,4000,4000,4000,4000) = 19.86%.
B = IRR(-36000,11200,11200,11200,11200,11200) = 16.80%.
Therefore, Project A is selected as it has more IRR.
3.
Compute the MIRR.
A = MIRR = 5 roof of (14068/12000) - 1 = 0.034.
B = MIRR = 5 root of (39393/36000) - 1 = 0.018.
4.
Compute the payback period.
A = 12000/4000 = 3 years
B = 36000/11200 = 3.21 years