HomeworkLib
Question

Use the following table to answer questions 1 – 6. The wacc is 10% for all projects in this table. Text Effects Year Project5. Projects B and D are mutually exclusive and can be replicated: a. Complete the table below: Project B Project D WACC 10.0%Please help with 5 and 6

business   finance   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1
Question 5 (a):
Step 1:
Calculation of Equivalent Annual Annuity of Projects B and D
Year Project B Project D
Cash Flows Discount Rate @10% Discounted Cash flows Cash Flows Discount Rate @10% Discounted Cash flows
0 -1000 1 -1000 -1000 1 -1000
1 300 0.909090909 272.7272727 600 0.909090909 545.4545455
2 400 0.826446281 330.5785124 800 0.826446281 661.1570248
3 500 0.751314801 375.6574005
4 600 0.683013455 409.8080732
NPV 388.7713 206.6116
Equivalent Annual Annuity of Project B = NPV / Annuity Discount Factor
   = 388.7713 / 4.16985446
   = 93.23
Equivalent Annual Annuity of Project D = NPV / Annuity Discount Factor
   = 206.6116 /2.73553719
   = 75.53
Step 2:
Calculation of NPV of Projects B and D using Replacement Chain Method
In this case project B should be repeated 3 times and project D for 5 times
So that projects will have equal life
Year Project B Project D
Cash Flows Discount Rate @10% Discounted Cash flows Cash Flows Discount Rate @10% Discounted Cash flows
0 -1000 1 -1000 -1000 1 -1000
1 300 0.909090909 272.7272727 600 0.909090909 545.4545455
2 400 0.826446281 330.5785124 800 0.826446281 661.1570248
3 500 0.751314801 375.6574005 -1000 0.751314801 -751.3148009
4 600 0.683013455 409.8080732 600 0.683013455 409.8080732
5 -1000 0.620921323 -620.9213231 800 0.620921323 496.7370584
6 300 0.56447393 169.342179 -1000 0.56447393 -564.4739301
7 400 0.513158118 205.2632473 600 0.513158118 307.8948709
8 500 0.46650738 233.2536901 800 0.46650738 373.2059042
9 600 0.424097618 254.458571 -1000 0.424097618 -424.0976184
10 -1000 0.385543289 -385.5432894 600 0.385543289 231.3259737
11 300 0.350493899 105.1481698 800 0.350493899 280.3951196
12 400 0.318630818 127.4523271 -1000 0.318630818 -318.6308177
13 500 0.28966438 144.8321899 600 0.28966438 173.7986278
14 600 0.263331254 157.9987526 800 0.263331254 210.6650034
NPV 780.0557731 631.9250345
Step 3:
Project B Project D
WACC 10% 10%
Equivalent Annual Annuity 93.23 75.53
Replacement Chain (RC) NPV 780.06 631.93

Question 5b:

Project B should be selected as Equivalent Annual Annuity and Replacement Chain (RC) NPV for Project B is higher than Project D

Step 1:
Year Project A Project B Project C Project D
Cash Flows Discount Rate @10% Discounted Cash flows Cash Flows Discount Rate @10% Discounted Cash flows Cash Flows Discount Rate @10% Discounted Cash flows Cash Flows Discount Rate @10% Discounted Cash flows
0 -1000 1 -1000 -1000 1 -1000 -1000 1 -1000 -1000 1 -1000
1 1000 0.909090909 909.0909091 300 0.909090909 272.7272727 550 0.909090909 500 600 0.909090909 545.4545455
2 0.826446281 0 400 0.826446281 330.5785124 450 0.826446281 371.9008264 800 0.826446281 661.1570248
3 0.751314801 0 500 0.751314801 375.6574005 350 0.751314801 262.9601803
4 0.683013455 0 600 0.683013455 409.8080732 250 0.683013455 170.7533638
NPV -90.9091 388.7713 305.6144 206.6116
Step 2:
Equivalent Annual Annuity of Project A = NPV / Annuity Discount Factor
   = -90.9091 /1.909091
   = -47.14
Equivalent Annual Annuity of Project B = NPV / Annuity Discount Factor
   = 388.7713 / 4.16985446
   = 93.23
Equivalent Annual Annuity of Project C = NPV / Annuity Discount Factor
   = 305.6144 /4.16985446
   = 73.29
Equivalent Annual Annuity of Project D = NPV / Annuity Discount Factor
   = 206.6116 /2.73553719
   = 75.53
Step 3:
Project B and C has higher NPV hence these should be selected based on NPV rule
Project B and D has higher Equivalent Annual Annuity is higher hence these should be selected based on EAA rule
0 0
Add a comment
Know the answer?
Add Answer to:
Please help with 5 and 6 Use the following table to answer questions 1 – 6....
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • Please help me solve 4-8 Use the following table to answer questions 1 – 6. The...

    Please help me solve 4-8 Use the following table to answer questions 1 – 6. The wacc is 10% for all projects in this table. Year Project A -1,000 1,000 Project B -1,000 300 400 500 600 Project C -1,000 550 450 350 250 Project D -1,000 600 800 1. Compute the Net Present Value (NPV), Internal Rate of Return (IRR), Profitability Index (PI), and Payback Period (PB) for each project: Project A Project B Project C Project D WACC...

  • Please answer questions 10-15. 10) If you have $10,000 to invest and you evaluate two mutually...

    Please answer questions 10-15. 10) If you have $10,000 to invest and you evaluate two mutually exclusive projects each requiring $10,000 of capital and both have positive NPV's should you invest in both. 10b) Are these projects independent? 11) Define IRR. 12) A project has the following cash flow and WACC data. What is the project's IRR? WACC: 11.00% Year Cash flows 0 $1,000 1 $450 2 $450 3 $450 12b) What is the MIRR? 13) Calculate the IRR WACC:...

  • 13. Problem 12.13 (Unequal Lives) eBook Haley's Crockett Designs Inc. is considering two mutually exclusive projects....

    13. Problem 12.13 (Unequal Lives) eBook Haley's Crockett Designs Inc. is considering two mutually exclusive projects. Both projects require an initial investment of $11,000 and are typical average-risk projects for the firm. Project A has an expected life of 2 years with after-tax cash inflows of $6,000 and $10,000 at the end of Years 1 and 2, respectively. Project B has an expected life of 4 years with after-tax cash inflows of $5,000 at the end of each of the...

  • s. Understanding the NPV profile Aa Aa If an independent project with conventional, or normal, cash flows is being...

    s. Understanding the NPV profile Aa Aa If an independent project with conventional, or normal, cash flows is being analyzed, the net present value (NPV) and internal rate of return (IRR) methods agree. Projects W and X are mutually exclusive projects. Their cash flows and NPV profiles are shown as follows. NPV (Dollars) Year Project W Project x 800 0 - $1,500 -$1,000 $200 $350 600 Project X 2 $350 $500 $400 $600 400 4 $600 $750 Project W 200...

  • A firm with a WACC of 10% is considering the following mutually exclusive projects: 0 1...

    A firm with a WACC of 10% is considering the following mutually exclusive projects: 0 1 2 3 4 5 Project 1 -$450 $40 $40 $40 $165 $165 Project 2 -$450 $350 $350 $110 $110 $110 Which project would you recommend? Select the correct answer. a. Both Projects 1 and 2, since both projects have IRR's > 0. b. Project 2, since the NPV2 > NPV1. c. Neither Project 1 nor 2, since each project's NPV < 0. d. Project...

  • NPV and Uher nvestment CrNErTa For Problems 1-4, use a 5% discount rate and the following...

    NPV and Uher nvestment CrNErTa For Problems 1-4, use a 5% discount rate and the following cash flows for projects A and B.: A: (-$2000, $500, $600, $700, $800) B: -$2000, $950, $850, $400, $300) 3. If A and B are mutually exclusive and the required rate of return is 5%, which should be ассеpted? 4. If the discount rate is 12%, and A and B are mutually exclusive, which project should be ассеpted? You can borrow $8,000, to be...

  • If an independent project with conventional, or normal, cash flows is being analyzed, the net present...

    If an independent project with conventional, or normal, cash flows is being analyzed, the net present value (NPV) and internal rate of return (IRR) methods agree. Projects W and X are mutually exclusive projects. Their cash flows and NPV profiles are shown as follows. NPV (Dollars) 800 0 -$1,00 Year Project W -$1,000 1 $200 2 $350 $400 $600 Project x -$1,500 $350 $500 $600 $750 Project X Project W If the weighted average cost of capital (WACC) for each...

  • If the projects were independent, which project(s) would be accepted according to the IRR method? a)...

    If the projects were independent, which project(s) would be accepted according to the IRR method? a) Neither b) Project A c) Project B d) Both Projects A or B If the projects were mutually exclusive, which project(s) would be accepted according to the IRR method? a) Neither b) Project A c) Project B d) Both Projects A or B The reason is a) TheNPV and IRR approaches use the same reinvestment rate assumption and so both approaches reach the same...

  • KEY TERMS Define the following terms: a. Capital budgeting; strategic business plan b. Net present value...

    KEY TERMS Define the following terms: a. Capital budgeting; strategic business plan b. Net present value (NPV) c. Internal rate of return (IRR) d. NPV profile; crossover rate e. Mutually exclusive projects; independent projects f. Nonnormal cash flows; normal cash flows; multiple IRRS g. Modified internal rate of return (MIRR) h. Payback period; discounted payback CAPITAL BUDGETING CRITERIA You must analyze two projects, X and Y. Each project costs $10,000, and the firm's WACC is 12%. The expected cash flows...

  • A firm with a WACC of 10% is considering the following mutually exclusive projects: 1 2...

    A firm with a WACC of 10% is considering the following mutually exclusive projects: 1 2 - 4 5 $50 $215 $215 Project 1 -$400 $50 $50 Project 2 -$600 $350 $350 Which project would you recommend? $110 $110 $110 Select the correct answer. O 10 10 O O a. Project 1, since the NPV1 > NPV2 b. Both Projects 1 and 2, since both projects have NPV's > 0. c. Neither Project 1 nor 2, since each project's NPV...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT