Question

b) Assuming the projects are independent, which one(s) would you recommend?

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: 1 1 2 3 4 5 Project M Project N - $9,000 $3,000 -$27,000 $8,400 $3,000 $8,400 $3,000 $8,400 $3,000 $8,400 $3,000 $8,400 a. Calculate NPV for each project. Do not round intermediate calculations. Round your answers to the nearest cent. Project M: $ Project N: $ Calculate IRR for each project. Do not round intermediate calculations. Round your answers to two decimal places. Project M: % Project N: Calculate MIRR for each project. Do not round intermediate calculations. Round your answers to two decimal places. Project M: % Project N: 0% Calculate payback for each project. Do not round intermediate calculations. Round your answers to two decimal places. Project M: years Project N: years Calculate discounted payback for each project. Do not round intermediate calculations. Round your answers to two decimal places. Project M: years Project N: years

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?

Answer 1

f IRR(B4:B9) B11 A В C D E F Cash flows Present value Simple cumulative cash flows Cumulative discounted cash flows PVIF@14% Project M Project N Project N Project M Project N Year Project M Project N Вxс Project M A C Ахс (9,000) $ (6,000) $ (3,000)$ (9,000.00) $ 2,631.58 $ 2,308.40 $ 2,024.91 $ 1,776.24 $ 1,558.11 $ (27,000.00) $ 7,368.42 $ 6,463.53$ 5,669.76 $ 4,973.47$ 4,362.70 $ (27,000) $ (18,600) $ (10,200) $ $ (9,000) $ 3,000 $ 3,000 $ 3,000 $ 3,000 $ 3,000 $ 1.000 $ 0.877 $ 0.769 $ 0.675 $ 0.592 $ 0.519 $ (27,000.00) (27,000) (9,000.00) 1 S (6,368.42) $ (4,060.02) $ (2,035.10) $ (258.86) $ 1,299.24 $ (19,631.58) 8,400 2 S 8,400 (13,168.05) (1,800) $ 6,600 $ 15,000 $ 3S (7,498.29) (2,524.82) 8,400 4 S 3,000 $ 6,000 $ 8,400 5 $ 1,837.88 8,400 10 $1,299.24 $1,837.88 16.80% NPV IRR 19.86% 11 12 Payback period 3.00 17.12% 15.51% 3.21 13 MIRR =MIRR(B4:B9,14%,14%) MIRR(C4:C9,14%,14%) Years 14 Years -3+1800/8400 15 16 Discounted Payback period 4.17 2.58 17 18 Years Years -4+258.86/1558.11 2+252 .82/4362.7 19 20 b) Correct option is "Both projects should be accepted since both of their NPV's are positive" 21 C) If the projects are mutually exclusive, the project with the highest positive NPV is chosen, Accept Project N." 22 d) The conflict between NPV and IRR occurs due to the difference in the size of the projects.

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