e If the two projects are mutually exclusive and the cost of

e. If the two projects are mutually exclusive and the cost of capital is 15%, which project should the firm undertake? -Select- f. What is the crossover rate? Round your answer to two decimal places g. If the cost of capital is 11%, what is the modified IRR (MIRR) of each project? Round your answers to two decimal places. Project A

Solution

a) Payback period of the projects

Project A= The cumulative cash flow upto second year is 15 (5+10), Balance cash flow to be recovered is 12 (27-15). Third year there is a cash flow of 15. This is spreaded for 12 months. Hence total period to cover 12 million cash flow is 9.6 month [(12month/15 x 12 (cash flow to be recovered)]

Hence payback period is 2.9 years

Project B= The first year cash flow is 20, Balance cash flow to be recovered is 7 (27-20). Seconnd year there is a cash flow of 10. This is spreaded for 12 months. Hence total period to cover 7 million cash flow is 8.4 month [(12month/10 x 7(cash flow to be recovered)]

Hence payback period is 1.8 years

b) Discounted payback period

Project A= The cumulative Discounted cash flow upto third year is 23.59 (4.51+8.12+10.97), Balance cash flow to be recovered is 3.41 (27-23.59). Fourth year there is a Discounted cash flow of 13.18. This is spreaded for 12 months. Hence total period to cover 3.41 million cash flow is 3.75 months[(12month/13.18x 3.41 (cash flow to be recovered)]

Hence payback period is 3.4years (3year and four months)

Project B= The cumulative Discounted cash flow upto second year is 26.14 (18.02+8.12), Balance cash flow to be recovered is 0 86(27-26.14). Third year there is a Discounted cash flow of 5.85. This is spreaded for 12 months. Hence total period to cover 0.86 million cash flow is 1.76 [(12month/5.85x 0.86(cash flow to be recovered)]

Hence Discounted payback period is 2.2 years (2 year and 2 months

c) Both the projects comes with Positive NPV, so the company can undertake both the projects

d) NPV of the projects when cost of capital is 5%

Since the projects are mutually exclusive the project with higher NPV should selected. So the Company should select project A with NPV of 16.25

e) NPV when Cost of capital is 15%

Project with Higher NPV should be taken, Hence Project B should be selected

Year	PVF, 11%	Project A CF	PV	Project B CF	PV
0	1	-27	-27	.27	-27
1	.901	5	4.51	20	18.02
2	.812	10	8.12	10	8.12
3	.731	15	10.97	8	5.85
4	.659	20	13.18	6	3.95
		NPV	9.77		8.94