Capital budgeting criteria PLEASE ROUND CORRECTLY AND FOLLOW WHAT THE PROBLEMS S
ID: 2759567 • Letter: C
Question
Capital budgeting criteria PLEASE ROUND CORRECTLY AND FOLLOW WHAT THE PROBLEMS SAYS TO ROUND
A firm with a 14% WACC is evaluating two projects for this year's capital budget. After-tax cash flows, including depreciation, are as follows:
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
Explanation / Answer
Year Project A Project B PV Factor @14% PV-Project A PV-Project B Cum Discounted Cum Discounted a b c a*b a*c Cashflow - A Cashflow - B 0 ($9,000) ($27,000) 1.0000 ($9,000) ($27,000) 1 $3,000 $8,400 0.8772 $2,632 $7,368 $2,632 $7,368 2 $3,000 $8,400 0.7695 $2,308 $6,464 $4,940 $13,832 3 $3,000 $8,400 0.6750 $2,025 $5,670 $6,965 $19,502 4 $3,000 $8,400 0.5921 $1,776 $4,973 $8,741 $24,475 5 $3,000 $8,400 0.5194 $1,558 $4,363 $10,299 $28,838 Total $1,299.24 $1,837.88 NPV Project A $1,299.24 Project B $1,837.88 IRR Project A - Present Value at 20% = 3000 * AF at 20% for 5 years - 9000 = 3000 * 2.9906 - 9000 = $-28.20 Present Value at 19% = 3000 * AF at 19% for 5 years - 9000 = 3000 * 3.0576 - 9000 = $172.80 IRR = 19% + (0 -172.80) /(-28.20 - 172.80) = 19% + (-172.80 / -201) = 19.8597% Project B - Present Value at 17% = 8400 * AF at 17% for 5 years - 27000 = 8400 * 3.1993 - 27000 = $-125.88 Present Value at 16% = 8400 * AF at 17% for 5 years - 27000 = 8400 * 3.2743 - 27000 = $504.12 IRR = 16% + (0 -504.12) /(-125.88 - 504.12) = 16% + (-504.12/-630) = 16.8002% Project A 19.86% Project B 16.80% MIRR Future Value of Inflows can be calculated using Annuity Formula = P * [(1+r)^n - 1]/r where, P is periodic inflow, r is WACC and n is time period Project A - Future Value of Inflows = 3000 * (1.14^5 - 1) / 0.14 = 19,830.31 MIRR = [(FV of Inflow / PV of Outflow)^1/n] - 1 = [(19830.31 / 9000) ^ 1/5] - 1 = (2.203368^1/5) - 1 = 1.171163 - 1 = 17.1163% Project B - Future Value of Inflows = 8400 * (1.14^5 - 1) / 0.14 = 55,524.87 MIRR = [(FV of Inflow / PV of Outflow)^1/n] - 1 = [(55,524.87 / 27000) ^ 1/5] - 1 = (2.056477^1/5) - 1 = 1.155114 - 1 = 15.5114% MIRR Project A 17.12% Project B 15.51% Payback - Outflow / Annual Inflows Project A = $9000/3000 3.00 years Project B = $27000/8400 3.21 years Discounted Payback Project A - It occurs between year 4-5 = 4 + (9000 - 8741) / 1558 = 4.17 years Project B - It occurs between year 4-5 = 4 + (27000 - 24475) /4363 = 4.58 years