CAPITAL BUDGETING CRITERIA A company has a 13% WACC and is considering two mutua

Question

CAPITAL BUDGETING CRITERIA A company has a 13% WACC and is considering two mutually exclusive investments (that cannot be repeated) with the following cash flows: 0 1 2 3 4 5 6 7 Project A -$300 -$387 -$193 -$100 $600 $600 $850 -$180 Project B -$405 $131 $131 $131 $131 $131 $131 $0 What is each project's NPV? Round your answer to the nearest cent. Do not round your intermediate calculations. Project A $ Project B $ What is each project's IRR? Round your answer to two decimal places. Project A % Project B % What is each project's MIRR? (Hint: Consider Period 7 as the end of Project B's life.) Round your answer to two decimal places. Do not round your intermediate calculations. Project A % Project B % From your answers to parts a-c, which project would be selected? If the WACC was 18%, which project would be selected? Construct NPV profiles for Projects A and B. Round your answers to the nearest cent. Do not round your intermediate calculations. Negative value should be indicated by a minus sign. Discount Rate NPV Project A NPV Project B 0% $ $ 5 10 12 15 18.1 23.01 Calculate the crossover rate where the two projects' NPVs are equal. Round your answer to two decimal places. Do not round your intermediate calculations. % What is each project's MIRR at a WACC of 18%? Round your answer to two decimal places. Do not round your intermediate calculations. Project A % Project B %

Explanation / Answer

Ans a-c) for project A is given in below table:

For project B

While analying above two table one should go with project A because NPV is greater for project A.

At 18% for project A

At 18% discount rate for project B

At cost of capital 18% one should select project B because it has more NPV then project A.

Crossover rate will be equal to 15.11% .

0 1 2 3 4 5 6 7 Cashflow -$300.00 -$387.00 -$193.00 -$100.00 600.00 600.00 850.00 -180.00 Present Value -$300.00 -$342.48 -$151.15 -$69.31 367.99 325.66 408.27 -76.51 NPV $162.48 IRR 18.10% MIRR 15.60%

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