). The director of capital budgeting for a firm has identified two mutually excl
ID: 2674350 • Letter: #
Question
). The director of capital budgeting for a firm has identified two mutually exclusive projects, A and B, with the following expected net cash flows:Expected Net Cash Flows
Year Project A Project B
0 ($100) ($100)
1 70 10
2 50 60
3 20 80
Both of the projects have a cost of capital of 14 percent.
(i) What is the regular payback period (in years) for Project B?
Regular (non-discounted) Payback Period for B = ____________________.
(ii) What is Project A's net present value (NPV)?
NPV for A = ____________________.
(iii) What is the profitability index (PI) for Project B?
Profitability Index for B = ____________________.
(iv) What is the modified internal rate of return for Project A?
MIRR for Project A = ____________________.
Explanation / Answer
(a)
Cumulative cashflow for project A
y1 = 10
y2 = 1+60 = 70
y3 = 70+80 = 150
payback required = 100
so payback period = 2 + 1*(100-70)/80 = 2 + 0.375 = 2.375
(b)
NPV of A = -100 + 70/(1+14%) + 50/(1+14%)^2 + 20/(1+14%)^3
= 13.3763155
(c)
PV of project B = 10/(1+14%) + 60/(1+14%)^2 + 80/(1+14%)^3
= 108.9377
profitability index = PV/initial investment
= 108.9377/100
= 1.089377
(d)
FV of positive cash flows of A = 20 + 50*(1+14%) + 70*(1+14%)
= 167.972
PV of negative cash flows = 100
n = 3 years
MIRR = (FV of positive cash flows/PV of negative cash flows)^(1/3) -1
= (167.972/100)^(1/3) - 1
= 18.8718%
Please rate my answer!
Thanks in advance :)
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.