A firm with a 14% WACC is evaluating two projects for this year\'s capital budge

Question

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: 0 4 Project M $18,000 $6,000 $6,000 $6,000 $6,000 $6,000 Project N $54,000 $16,800 $16,800 $16,800 $16,800 $16,800 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 years years 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 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 there a conflict between NPV and IRR? Select Select

Explanation / Answer

b) option c both the NPV are positive.

c)Option a NPV of project N is higher

d) Option d the size of the project causes difference

A B C D E F Year 0 1 2 3 4 5 1 Project M -18000 6000 6000 6000 6000 6000 2 Project N -54000 16800 16800 16800 16800 16800 3 Incremental Cash flow 36000 -10800 -10800 -10800 -10800 -10800 4 WACC 14% a) NPV of M $2,598.49 NPV(A4,B1:F1) NPV of N $3,675.76 NPV(A4,B2:F2) IRR of M 19.86% IRR(A1:F1) IRR of N 16.80% IRR(A2:f2) FV of Cash flows of M $39,660.62 FV(14%,5,6000) MIRR of M 17.12% MIRR = ((FV/Investment)^1/5)-1 FV of Cash flows of N $111,049.75 FV(14%,5,16800) MIRR of N 15.51% MIRR = ((FV/Investment)^1/5)-1 A B C D E F Year 0 1 2 3 4 5 Project M -18000 6000 6000 6000 6000 6000 Incremental cash flows -18000 -12000 -6000 0 6000 12000 Payback period 3 years (period at which incremental cash flows =0) A B C D E F Year 0 1 2 3 4 5 Project N -54000 16800 16800 16800 16800 16800 Incremental cash flows -54000 -37200 -20400 -3600 13200 30000 Payback period 3.21 years (period at which incremental cash flows =0) Pay back period = 3 + 3600/16800 years A B C D E F Year 0 1 2 3 4 5 Project M -18000 6000 6000 6000 6000 6000 Discounted Cash flows -18000 5263.16 4616.81 4049.83 3552.48 3116.21 Incremental discounted cash flow -18000 -12736.84 -8120.04 -4070.21 -517.73 2598.49 Discounted Payback period 4.17 years (period at which incremental cash flows =0) Discounted PB 4+517.73/6000 A B C D E F Year 0 1 2 3 4 5 Project M -54000 16800 16800 16800 16800 16800 Discounted Cash flows -54000 14736.84 12927.05 11339.52 9946.95 8725.39 Incremental discounted cash flow -54000 -39263.16 -26336.10 -14996.58 -5049.63 3675.76 Discounted Payback period 4.58 years (period at which incremental cash flows =0) Discounted PB 4+5049.63/16800

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