Problem 11-6 NPV Your division is considering two projects with the following ca

Question

Problem 11-6
NPV

Your division is considering two projects with the following cash flows (in millions):

What are the projects' NPVs assuming the WACC is 5%? Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55.
Project A    $   million
Project B    $   million

What are the projects' NPVs assuming the WACC is 10%? Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55.
Project A    $   million
Project B    $   million

What are the projects' NPVs assuming the WACC is 15%? Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55.
Project A    $   million
Project B    $   million

What are the projects' IRRs assuming the WACC is 5%? Round your answer to two decimal places.
Project A   %
Project B   %

What are the projects' IRRs assuming the WACC is 10%? Round your answer to two decimal places.
Project A   %
Project B   %

What are the projects' IRRs assuming the WACC is 15%? Round your answer to two decimal places.
Project A   %
Project B   %

If the WACC were 5% and A and B were mutually exclusive, which would you choose? (Hint: The crossover rate is 26.71%.)
-Select- Project A Project B Neither A, nor B

If the WACC were 10% and A and B were mutually exclusive, which would you choose? (Hint: The crossover rate is 26.71%.)
-Select- Project A Project B Neither A, nor B

If the WACC were 15% and A and B were mutually exclusive, which would you choose? (Hint: The crossover rate is 26.71%.)
-Select- Project A, Project B, Neither A, nor B

0 1 2 3

Explanation / Answer

Solution.

Calculation of net present value and IRR.

For IRR used spread sheet.

Year

0

1

2

3

NPV

IRR

Year

0

1

2

3

NPV

IRR

Year

0

1

2

3

NPV

IRR

If the WACC were 5% and A and B were mutually exclusive, = Project B

If the WACC were 10% and A and B were mutually exclusive, = Neither A, nor B.

If the WACC were 15% and A and B were mutually exclusive, = Neither A, nor B

Cash flow Table value PV

Year

Project A Project B 5% Project A Project B

0

         (11.00)        (20.00)              1.0000    (11.0000)     (20.0000)

1

             4.00           12.00              0.9520         3.8080       11.4240

2

             7.00             5.00              0.9070         6.3490         4.5350

3

             1.00             9.00              0.8630         0.8630         7.7670

NPV

            0.02              3.73

IRR

0.1049% 9.9033% Cash flow Table value PV

Year

Project A Project B 10% Project A Project B

0

         (11.00)        (20.00)              1.0000    (11.0000)     (20.0000)

1

             4.00           12.00              0.9090         3.6360       10.9080

2

             7.00             5.00              0.8260         5.7820         4.1300

3

             1.00             9.00              0.7510         0.7510         6.7590

NPV

     (0.8310)         1.7970

IRR

-4.4533% 4.9208% Cash flow Table value PV

Year

Project A Project B 15% Project A Project B

0

         (11.00)        (20.00)              1.0000    (11.0000)     (20.0000)

1

             4.00           12.00              0.8690         3.4760       10.4280

2

             7.00             5.00              0.7560         5.2920         3.7800

3

             1.00             9.00              0.6570         0.6570         5.9130

NPV

          (1.58)              0.12

IRR

-8.6085% 0.3405%

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