11-17 Capital Budgeting Criteria A company has a 12% WACC and is considering two

Question

11-17

Capital Budgeting Criteria

A company has a 12% WACC and is considering two mutually exclusive investments (that cannot be repeated) with the following cash flows:

0              1              2              3              4              5              6              7

Project A   -$300     -$387     -$193     -$100     $600       $600       $850       -$180

Project B              -$405     $134       $134       $134 $134 $134 $134 $0

A.      What is each project%u2019s NPV?

B.      What is each project%u2019s IRR?

C.      What is each project%u2019s MIRR? (Hint: Consider period 7 as the end of the project B%u2019s life.)

D.      From your answers to Parts a, b, and c, which project would be selected? If the WACC was 18%, which project would be selected?

E.       Construct NPV profiles for Projects A and B.

F.       Calculate the crossover rate where the two projects%u2019 NPVs are equal.

G.     What is each project%u2019s MIRR at a WACC of 18%?

Explanation / Answer

Year A B 12% A B Y0 -300 -405               1.00     (300.00)     (405.00) Y1 -387 134               0.89     (345.54)      119.64 Y2 -193 134               0.80     (153.86)      106.82 Y3 -100 134               0.71       (71.18)        95.38 Y4 600 134               0.64      381.31        85.16 Y5 600 134               0.57      340.46        76.04 Y6 850 134               0.51      430.64        67.89 Y7 -180 0               0.45       (81.42)             -   NPV      200.41      145.93

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