Patrick Company is evaluating these mutually exclusive projects below. - Which p
ID: 2725703 • Letter: P
Question
Patrick Company is evaluating these mutually exclusive projects below.
- Which projects would you pick under the NPV, IRR, and MIRR for each project?
- For every project accepted or rejected under each method, give a reason.
- Use the Patrick Company WACC calculated above rounded to 2 decimal places.
Project A) Year 0: -$6,000; Year 1: $2,000; Year 2: $300; Year 3: $400; Year 4: $700; Year 5: $1,325; Year 6: $700; Year 7: $700
Project B) Year 0: -$5,550; Year 1: -$800; Year 2: $725; Year 3: $32; Year 4: -$325; Year 5: $35; Year 6: $1,600; Year 7: $725
Explanation / Answer
NPV: (Net Discounted Present Value) In the above problem , the Cost of Capital (CoC) or WACC is not given. So Presuming CoC 8%, we can solve the problem as follows: NPV(A)=-6000+2000/(1.08^1)+300/(1.08^2)+400/(1.08^3)+700/(1.08^4)+1325/(1.08^5)+700/(1.08^6)+700/(1.08^7)=-1307.56 NPV(B)=-5550-800/(1.08^1)+725/(1.08^2)+32/(1.08^3)-325/(1.08^4)+35/(1.08^5)+1600/(1.08^6)+725/(1.08^7)=-4427.53 Neither Project should beaccepted. IRR IRR(A) =6000-2000/(R^1)+300/(R^2)+400/(R^3)+700/(R^4)+1325/(R^5)+700/(R^6)+700/(R^7)=0 By solving , we get R=1.0055 or IRR=0.55% IRR(B) =-5550-800/(R^1)+725/(R^2)+32/(R^3)-325/(R^4)+35/(R^5)+1600/(R^6)+725/(R^7)=0 By solving , we get IRR to be astronomicaally small value close to zero Neither Project should beaccepted.