Your division is considering two investment projects, each of which requires an

Question

Your division is considering two investment projects, each of which requires an up-front expenditure of $22 million. You estimate that the cost of capital is 10% and that the investments will produce the following after-tax cash flows

Year Project A   Project B

1 5 20

2 10 10

3 15 8

4 20 6

a. What is the regular payback period for each of the projects? Round your answers to two decimal places.

Project A  years

Project B  years

b. What is the discounted payback period for each of the projects? Round your answers to two decimal places.

Project A  years

Project B  years

c. What is the crossover rate? Round your answer to two decimal places. (in %)

d. If the cost of capital is 10%, what is the modified IRR (MIRR) of each project? Round your answers to two decimal places.

Project A  %

Project B  %

Explanation / Answer

Payback Period Project A Year Cumulative Discount Net flow Cumulative 0 -22 -22 1 -22 -22 1 5 -17 0.909091 4.545455 -17.4545 2 10 -7 0.826446 8.264463 -9.19008 3 15 8 0.751315 11.26972 2.079639 4 20 28 0.683013 13.66027 15.73991 Payback period = 2+7/15 = 2.5 Years approximately Discoumted payback period = 2+9/11 2.82 Years approximately Project B Year Cumulative Net flow Cumulative 0 -22 -22 1 -22 -22 1 20 -2 0.909091 18.18182 -3.81818 2 10 8 0.826446 8.264463 4.446281 3 8 16 0.751315 6.010518 10.4568 4 6 22 0.683013 4.098081 14.55488 Payback Period = 1+2/10 1.2 Years approximately Discounted payback period = 1+3./8.2 1.46 years approximately

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