Please help me solve CAPITAL BUDGETING CRITERIA A firm with a 14% WACC is evalua
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CAPITAL BUDGETING CRITERIA 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: 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 Project N 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 years years years years b. Assuming the projects are independent, which one(s) would you recommend? c. If the projects are mutually exclusive, which would you recommend? d. Notice that the projects have the same cash flow timing pattern. Why is tere a conflict between NPV and IRR? Select- Select- Select-Explanation / Answer
Project M:
NPV = -27000 + (9000/0.14)*(1 - 1/1.14^5) = 3,897.73
At r = IRR, NPV = 0
27000 = (9000/r)*(1 - 1/(1 + r)^5)
PV = 27000, PMT = 9000, N = 5, FV = 0; compute r = 19.86%
IRR = 19.86%
For MIRR,
PV of cash outflow = 27000
FV of cash inflow = (9000/0.14)*(1.14^5 - 1) = 59490.94
MIRR = (59490.94/27000)^(1/5) - 1 = 0.171163189 = 17.12%
Payback period = 27000/9000 = 3 years
Discounted payback period = 4 + 777/4674 = 4.17 years
Project N:
NPV = 5,513.64
IRR = 16.80%
Crossover rate = 15.24%
MIRR = 15.51%
Payback period = 81000/25200 = 3.21 Years
Discounted payback period = 4 + 7574/13088 = 4.58 years
If both projects are independent, both are recommended because both have positive NPV at given WACC.
If both are mutually exclusive, project N is recommended because its NPV is higher at given WACC.
For WACC < 15.24%, project N is better.
For 15.24% < WACC, project M is better.
0 1 2 3 4 5 IRR MIRR NPV CF (M) -27,000 9,000 9,000 9,000 9,000 9,000 19.86% 17.12% 3,897.73 CF (N) -81,000 25,200 25,200 25,200 25,200 25,200 16.80% 15.51% 5,513.64 CF (N - M) -54,000 16,200 16,200 16,200 16,200 16,200 15.24% DCF (M) -27,000 7,895 6,925 6,075 5,329 4,674 Commu DCF (M) -27,000 -19,105 -12,180 -6,105 -777 3,898 DCF (N) -81,000 22,105 19,391 17,009 14,920 13,088 Commu DCF (N) -81,000 -58,895 -39,504 -22,495 -7,574 5,514