Your division is considering two investment projects, each of which requires an
ID: 2680239 • Letter: Y
Question
Your division is considering two investment projects, each of which requires an upfront expenditure of $22 million. You estimate that the cost of capital is 11.00% and that the investments will produce the following after-tax cash flows (in millions of dollars):
Year Project A Project B
0 -22 -22
1 5 20
2 10 10
3 15 8
4 20 6
What is the regular payback period for each of the projects?
What is the discounted payback period for each of the projects?
If the two projects are independent and the cost of capital is 11.00% which project or projects should the firm undertake?
If the two projects are mutually exclusive and the cost of capital is 7.00%, which project should the firm undertake?
If the two projects are mutually exclusive and the cost of capital is 16.00%, which project should the firm undertake?
What is the crossover rate?
If the cost of capital is 11.00%, what is the modified IRR (MIRR) of each project?
Explanation / Answer
a) Calculating the NPV of two projects at 5% Calculating the NPV of two projects at 10% Calculating the NPV of two projects at 15% b) The IRR is the internal rate of return at which the Project's Net present value of series of cash flows is equal to zero.IRR can be calculated without the use of cost of capital. Therefore, calculating the IRR of each project using excel sheet: Step1: Go to excel and enter the cash flows in a column Step2: Select any cell beside the column and enter the formula as "=IRR(select cash flows from year-0 to year-3)" Step3: Enter the formula as above and click "OK" to get the desired value. Therefore, the IRR of porject-A is 43.97% and IRR of Project-B is 82.03%
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