Your division is considering two investment projects, each of which requires an

Question

Your division is considering two investment projects, each of which requires an up-front expenditure of $24 million. You estimate that the cost of capital is 8% and that the investments will produce the following after-tax cash flows (in millions of dollars): Project A year 1 = 5, year 2 = 10, year 3= 15, year 4 = 20. Project B year 1 = 20, year 2 = 10, year 3 = 8, year 4= 6.

a) What is the regular payback period for each of the projects (years)? Round your answers to two decimal places.

b) What is the discounted payback period for each of the projects (years)? Round your answers to two decimal places.

c)What is the crossover rate? Round your answer to two decimal places.

d)If the cost of capital is 8%, what is the modified IRR (MIRR) of each project? Round your answers to two decimal places.

Explanation / Answer

Project-A Year Project-A Cumulative Cash Flow Reinvested for MIRR@8% PV@8% Cumulative Cash Flow 0 -24 -24 -24 -24 1 5 -19 6.30 4.63 -19.37 2 10 -9 11.66 8.57 -10.80 3 15 6 16.20 11.91 1.11 4 20 26 20.00 14.70 15.81 54.16 Project-B Year Project-A Cumulative Cash Flow Reinvested for MIRR@8% PV@8% Cumulative Cash Flow 0 -24 -24 -24 -24 1 20 -4 25.19 18.52 -5.48 2 10 6 11.66 8.57 3.09 3 8 14 8.64 6.35 9.44 4 6 20 6.00 4.41 13.85 51.50 a>Pay back-A=2+(9/15) 2.6 Payback B=1+(4/10) 1.4 b>Discounted Payback-A=2+(10.80/11.91) 2.91 Discounted Payback-B=1+(5.48/8.57) 1.64 c>At cross over rate B32(Say) 10% =5/(B32^1)+10/(B32^2)+15/(B31^3)+20/(B32^4)-20/(B32^1)-10/(B32^2)-8/(B32^3)-6/(B32^4) d>24*(1+r)^4=54.16 or 1+r=(54.16/24)^(1/4) 1.2257 or r=1.2257-1=0.2257=MIRR 22.57% Project-A 24*(1+r)^4=51.50 1+r=(51.50/24)^(1/4) 1.2103 r=1.2103-1=0.2103=MIRR 21.03% Project-B

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