You are a financial manager for the Hittle Company. The director of capital budg
ID: 2692006 • Letter: Y
Question
You are a financial manager for the Hittle Company. The director of capital budgeting has asked you to analyze two proposed capital investments, Project X and Y. Each project has a cost of $10,000 and the cost of capital for each project is 12%. The project's expected net cash flows are as follows: Calculate each project's payback period, net present value (NPV), internal rate of return (IRR), and modified internal rate of return (MIRR). Which project or projects should be accepted if they are independent? Which project or projects should be accepted if they mutually exclusive? How might a change in the cost of capital produce a conflict between the NPV and IRR rankings of these two projects? Would this conflict exist if r were 5%? (Hint: plot the NPV profiles) Why does the conflict exist?Explanation / Answer
At a cost of capital of 10% Project X provides higer return on investment and it holds true when cost of capital drops to 5% Project X -10000 6500 3000 3000 1000 WACC = 10% IRR = 18.03% Annualized IRR = 18.03% MIRR = 13.48% Discounted Payback Period: 2.72 years. Payback Period: 2.17 years. NPV = 1325.39 NFV = 2134.55 Profitability Index: 1.13 Equivalent Annual Annuity/Cost (EAA|EAC): 418.12 , Project Y -10000 3500 3500 3500 3500 WACC = 10% IRR = 14.96% Annualized IRR = 14.96% MIRR = 12.89% Discounted Payback Period: 3.54 years. Payback Period: 2.86 years. NPV = 1094.53 NFV = 1762.75 Profitability Index: 1.11 Equivalent Annual Annuity/Cost (EAA|EAC): 345.29 ,Project X -10000 6500 3000 3000 1000 WACC = 5% IRR = 18.03% Annualized IRR = 18.03% MIRR = 13.48% Discounted Payback Period: 2.72 years. Payback Period: 2.17 years. NPV = 1325.39 NFV = 2134.55 Profitability Index: 1.13 Equivalent Annual Annuity/Cost (EAA|EAC): 418.12 ,Project Y -10000 3500 3500 3500 3500 WACC = 5% IRR = 14.96% Annualized IRR = 14.96% MIRR = 12.89% Discounted Payback Period: 3.54 years. Payback Period: 2.86 years. NPV = 1094.53 NFV = 1762.75 Profitability Index: 1.11 Equivalent Annual Annuity/Cost (EAA|EAC): 345.29
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