Hamlin Corporation, Inc. (HCI) is considering two mutually exclusive capital pro
ID: 2617584 • Letter: H
Question
Hamlin Corporation, Inc. (HCI) is considering two mutually exclusive capital projects (that is, HCI may accept only one of the two projects)..
HCI has a 7% WACC;
HCI has the ability to invest available cash flows at its WACC;
Each project has 7-year life;
Cash flows for each of the two projects follow:
TASKS: Please -
A. Calculate and interpret each project’s internal rate of return (IRR);
B. Calculate and interpret each project’s modified internal rate of return (MIRR);
C. Write a “management recommendation memo” explaining which mutually exclusive project HCI should accept.
D. Suppose that HCI’s WACC is 18% (instead of 7%)
- Calculate and interpret each project’s internal rate of return (IRR);
- Calculate and interpret each project’s modified internal rate of return (MIRR);
- Write a “management recommendation memo” explaining which mutually exclusive project HCI should accept.
E. ANALYTICAL THINKING and CONCEPT INTEGRATION NARRATIVE:
- Write a narrative that compares and contrasts the characteristics and the calculation of:
i. a bond’s yield-to-maturity (YTM) and those of the IRR.
ii. a bond investor’s “true yield” and those of the MIRR.
TIP! … creating a TVM example would put “icing on the explanation cake”.
2 4 Project A -$300 -$387 193-$100 $600 $600 850$180 Project B-$405 $134 $134 134 134 $134 $134 $0Explanation / Answer
I am going to answer the first 4 parts to the question:
A )We can use excel IRR function to calculate the IRR of the project. The syntax for IRR is:
IRR(values,[guess])
where values is the series of cash flows. Guess can be left blank.
Year
Project A
Project B
0
-300
-405
1
-387
134
2
-193
134
3
-100
134
4
600
134
5
600
134
6
850
134
7
-180
0
IRR
18.10%
23.97%
B) The excel syntax to for MIRR function:
MIRR(values,finance_rate,reinvest_rate)
values= series of cash flows
finance_rate= the interest rate paid on the money used in the cash flows (WACC)
reinvest_rate= the interest paid on the reinvested cash flows (WACC)
Year
Project A
Project B
0
-300
-405
1
-387
134
2
-193
134
3
-100
134
4
600
134
5
600
134
6
850
134
7
-180
0
MIRR
12.47%
14.20%
C) HCI can choose both the projects as return (IRR and MIRR) is higher than the WACC. If it has to choose one it will choose Project B because of the higher return.
D) Find the below tables
Year
Project A
Project B
0
-300
-405
1
-387
134
2
-193
134
3
-100
134
4
600
134
5
600
134
6
850
134
7
-180
0
IRR
18.10%
23.97%
Year
Project A
Project B
0
-300
-405
1
-387
134
2
-193
134
3
-100
134
4
600
134
5
600
134
6
850
134
7
-180
0
MIRR
9.54%
20.49%
When you have to projects with unequal cash flows your decision should be based on MIRR. Since MIRR is greater than the WACC (18%) for project B we should accept project B.
Year
Project A
Project B
0
-300
-405
1
-387
134
2
-193
134
3
-100
134
4
600
134
5
600
134
6
850
134
7
-180
0
IRR
18.10%
23.97%
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