Capital budgeting criteria A firm with a 13% WACC is evaluating two projects for

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 2 3 4 Project M $27,000 $9,000 $9,000 $9,000 $9,000 $9,000 Project N -$81,000 $25,200 $25,200 $25,200 $25,200 $25,200 a. Calculate NPV for each project. Round your answers to the nearest cent. Do not round your intermediate calculations Project M $4655.0 Project N $7634.2 Calculate IRR for each project. Round your answers to two decimal places. Do not round your intermediate calculations Project M Project N Calculate MIRR for each project. Round your answers to two decimal places. Do not round your intermediate calculations Project M Project N Calculate payback for each project. Round your answers to two decimal places. Do not round your intermediate calculations Project M Project N Calculate discounted payback for each project. Round your answers to two decimal places. Do not round your intermediate calculations Project M Project N 19.86 % 16.80 % 16.65 % 15.05 % 3.00 years 3.21 years 4.05 years 4.44 years

Explanation / Answer

ans: Calculation of NPV Project M Year Cash flow(in $) PVAF 13% Net cash Flow(in $) 0 -27000 1 -27000 1 9000 0.8850 7964.60177 2 9000 0.7831 7048.32015 3 9000 0.6931 6237.45146 4 9000 0.6133 5519.86855 5 9000 0.5428 4884.83942 NPV 4655.08135 Project N Year Cash flow(in $) PVAF 13% Net cash Flow(in $) 0 -81000 1 -81000 1 25200 0.8850 22300.885 2 25200 0.7831 19735.2964 3 25200 0.6931 17464.8641 4 25200 0.6133 15455.6319 5 25200 0.5428 13677.5504 NPV 7634.22779 Calculation of IRR Let R=15% Project M Year Cash flow(in $) PVAF 15% Value 0 -27000 1 -27000 1 9000 0.8696 7826.0870 2 9000 0.7561 6805.2930 3 9000 0.6575 5917.6461 4 9000 0.5718 5145.7792 5 9000 0.4972 4474.5906 NPV 3169.3959 IRR= 13%+(4655/(4655-3169))(15-13) 19.86 For N Year Cash flow(in $) PVAF 15% Value 0 -81000 1 -81000 1 25200 0.8696 21913.0435 2 25200 0.7561 19054.8204 3 25200 0.6575 16569.4091 4 25200 0.5718 14408.1818 5 25200 0.4972 12528.8537 NPV 3474.30847 IRR= 13%+(7634/(7634-3474))(15-13) 16.70% Calculation of Discounted Pay back period Project M Year Cash flow(in $) PVAF 13% Net cash Flow(in $) Commulative cash flow 0 -27000 1 -27000 -27000 1 9000 0.8850 7964.6018 -19035.3982 2 9000 0.7831 7048.3202 -11987.0781 3 9000 0.6931 6237.4515 -5749.6266 4 9000 0.6133 5519.8685 -229.7581 5 9000 0.5428 4884.8394 4655.0814 4year+229.75/4884.84 4.05 Project N Year Cash flow(in $) PVAF 13% Net cash Flow(in $) Commulative cash flow 0 -81000 1 -81000 -81000 1 25200 0.8850 22300.885 -58699.11504 2 25200 0.7831 19735.2964 -38963.81862 3 25200 0.6931 17464.8641 -21498.95453 4 25200 0.6133 15455.6319 -6043.322596 5 25200 0.5428 13677.5504 7634.227791 4+6043/13677 4.44 years Calculation of Pay back period Project M Year Cash flow(in $) Commulative cash flow 0 -27000 -27000 1 9000 -18000 2 9000 -9000 3 9000 0 4 9000 9000 5 9000 18000 3 years Project N Year Cash flow(in $) Commulative cash flow 0 -81000 -81000 1 25200 -55800 2 25200 -30600 3 25200 -5400 4 25200 19800 5 25200 45000 3yr+5400/25200 3.21

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