Homework SourseA firm with a 14 WACC is evaluating two projects for this ye
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
Solution
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 |
