A Firm with a 14% WACC is evaluating two projects for this year\'s capital budge

Question

A Firm with a 14% WACC is evaluating two projects for this year's capital budget. After tax cash flows, including depreciation are as follows;

Project A; -6,000 , 2,000, 2,000, 2,000, 2,000, 2,000

Project B;  -18,000, 5,600, 5,600, 5,600,5,600, 5,600

1. Calculate NPV, IRR, MIRR, payback and discounted paybac for each project.

2. Assuming the projects are independent which one would you recommend?

3. If the projcet are mutually exclusive which would you recommend?

4. Notice that the projects have the same cash flow timing pattern. Why is there a  conflict between NPV and IRR?

Pleas show step by step calculation ( I do have a HP 10ll + Calculator). So which ever is easier.

Explanation / Answer

Project A

With MS Excel

IRR = 19.86%
NPV = $866.16

With FinXL IRR = 19.858 %
With FinXL NPV = 866.16

With FinFreedom MIRR = 17.12 %
With FinFreedom Payback Period = 3 yrs and 0 mo.
With FinFreedom Discounted Payback Period = 4 yrs and 2 mo.
With FinFreedom Profitability Index = 1.144


Project B

With MS Excel
IRR = 16.80%
NPV = $1,225.25


With FinXL IRR = 16.797 %
With FinXL NPV = $1225.25

With FinFreedom MIRR = 15.51%
With FinFreedom Payback Period = 3 yrs and 3 mo.
With FinFreedom Discounted Payback Period = 4 yrs and 7 mo.
With FinFreedom Profitability Index = 1.068


----------- Project A ------ Project B
IRR ------ 19.86 % -------- 16.80%
MIRR ------ 17.12 % -------- 15.51
NPV ------ $866.16 -------- $1225.25
PI ------ 1.144 ---------- 1.068
PBP ------ 3 yrs 0 mon ---- 3 yrs 3 mon
DPBP ------ 4 yrs 2 mon ---- 4 yrs 7 mon

Project A should be accepted instead of Project B

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