Question

A firm with a 13% WACC is evaluating two projects for this year's capital budget. After-tax cash flows, including depreciation, are as follows: 1 2 Project M Project N - $3,000 -$9,000 $1,000 $2,800 $1,000 $2,800 $1,000 $2,800 $1,000 $2,800 $1,000 $2,800 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: 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 b. Assuming the projects are independent, which one(s) would you recommend? -Select-

Answer 1

Using excel formula to calculate

		M	N
	Year	Project M	Project N
1	0	-3000	-9000
2	1	1000	2800
3	2	1000	2800
4	3	1000	2800
5	4	1000	2800
6	5	1000	2800
	NPV	$517.23	$848.25
	Using excel formula	NPV(0.13,A2:A6)+A1	NPV(0.13,B2:B6)+B1
	IRR	19.86%	16.80%
	Using excel formula	IRR(A1:A6)	IRR(B1:B6)
	MIRR	16.65%	15.05%
	Using excel formula	MIRR(A1:A6,13%,13%)	MIRR(B1:B6,13%,13%)

Payback Period  

Year	0.00	1	2	3	4	5
Project A	-3000.00	1000	1000	1000	1000	1000
Cumulative Cash flow	-3000.00	-$2,000.00	-$1,000.00	$0.00	$1,000.00	$2,000.00
Payback Period	3.00
excel formula	(3+0/1000)
Year	0.00	1	2	3	4	5
Project A	-9000.00	2800	2800	2800	2800	2800
Cumulative Cash flow	-9000.00	-$6,200.00	-$3,400.00	-$600.00	$2,200.00	$5,000.00
Payback Period	3.21
excel formula	(=3+600/2800)

cumulative Cash flow	0.00	1	2	3	4	5
Project A	-3000.00	1000	1000	1000	1000	1000
Discounted Cash Flow	-3000.00	884.96	783.15	693.05	613.32	542.76
Cumulative Cash flow	-3000.00	-$2,115.04	-$1,331.90	-$638.85	-$25.53	$517.23
Discounted Payback Period	4.04
excel formula	4+25.53/542.76
Year	0.00	1	2	3	4	5
Project A	-9000.00	2800	2800	2800	2800	2800
Discounted Cash Flow	-9000.00	2477.88	2192.81	1940.54	1717.29	1519.73
Cumulative Cash flow	-9000.00	-$6,522.12	-$4,329.31	-$2,388.77	-$671.48	$848.25
Discounted Payback Period	4.44
excel formula	4+671.48/1519.73

b. If Project is independent both projects should be selected as they have positive NPV.

c.If Project is mutually exclusive Project N should be selected as they have higher NPV.

d.Conflict between NPV and IRR due to difference in size of projects between M and N