Problem 11-17 Capital budgeting criteria A company has a 12% WACC and is conside

Question

Problem 11-17 Capital budgeting criteria A company has a 12% WACC and is considering two mutually exclusive investments (that cannot be repeated) with the following cash flows: Project A$300 387 $193 -$100 $600 $600 $850 $180 Project B $405 131 $131 $131 131 131 $131 a. What is each project's NPV? Round your answer to the nearest cent. Project A$ Project B$ b. What is each project's IRR? Round your answer to two decimal places. Project A Project B c. What is each project's MIRR? (Hint: Consider Period 7 as the end of Project B's life.) Round your answer to two decimal places. Project A Project E d. From your answers to parts a-c, which proiect would be selected? Select. If the WACC was 18%, which project would be selected? Select. e. Construct NPV profiles for Plans A and B. Round your answers to the nearest cent. 096 10 12 15 18.1 23.01 f. Calculate the crossover rate where the two projects' NPVs are equal. Round your answer to two decimal places. What is each project's MIRR at a WACC of 18%? Round your answer to two decimal places. Project A Project B

Explanation / Answer

NPV, IRR and MIRR can be calculated using the same function in excel.

d) At 12%, NPV for A is greater and hence, select A.

At 18%, NPV for B is greater and hence, select B.

f) Crossover rate = 15.11% is the IRR of the difference in the cash flows of two projects.

-300 -405 -387 131 -193 131 -100 131 600 131 600 131 850 131 -180 0 NPV (12%) $200.41 $133.59 IRR 18.10% 23.01% MIRR (12%) 15.10% 16.66% MIRR (18%) 18.05% 20.10%

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