Your division is considering two projects with the following cash flows (in mill

Question

Your division is considering two projects with the following cash flows (in millions):

0 1 2 3

Project A -$25  $5  $10 $17

Project B -$20 $10 $9 $6

a. What are the projects’ NPVs assuming the WACC is 5%? 10%? 15%?

b. What are the projects’ IRRs at each of these WACCs?

c. The WACC was 5% and A and B were mutually exclusive, which project would you choose? What if the WACC was 10%? 15%? (Hint: The crossover rate is 7.81%)

I have part a done, but need step-by-step explanations of parts b and c, without the use of Excel. If you've already done this, feel free to post part a for everyone else. I don't know how to post properly formatted documents here; formatting disappears when I paste.

Explanation / Answer

b) I believe that question is asking for MIRR as pure IRR doesnot involve WACC

MIRR = ((Sum of future value of cashflows/initial investment outlay)^(1/life of project) – 1)*100

Future value of cash flow = Cash flow value * compounding factor

Compounding factor = (1 + discount rate)^(Life of project – corresponding time of cashflow)

Project A MIRRs

Project B MIRRs

C) Mutually exclusive projects are those that either one of the two could be chosen. This choice is done based on NPV. Project with greater NPV is chosen . Since you have done part a, use the NPVs for both projects at different WACCs and determine which project has greater NPV at a particular WACC, that is the project you are going to chose at that level of WACC.

WACC =   5.000% Year 0 1 2 3 Cash flow stream -25 5 10 17 Compounding factor= 1.1025 1.05 1 FV of cash flows= 5.5125 10.5 17 Sum of FV of cash flows= 33.0125 MIRR= 9.70998

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