A firm with a 13% WACC is evaluating two projects for this year\'s capital budge

Question

A firm with a 13% WACC is evaluating two projects for this year's capital budget. After-tax cash flows, including depreciation, are as follows: years 0 1 2 3 4 5 Project A -$30,000 $10,000 $10,000 $10,000 $10,000 $10,000 Project B -$90,000 $28,000 $28,000 $28,000 $28,000 $28,000 a. Calculate NPV for each project. Round your answers to the nearest cent. Project A $ Project B $ Calculate IRR for each project. Round your answers to two decimal places. Project A % Project B % Calculate MIRR for each project. Round your answers to two decimal places. Project A % Project B % Calculate payback for each project. Round your answers to two decimal places. Project A years Project B years Calculate discounted payback for each project. Round your answers to two decimal places. Project A years Project B years

Explanation / Answer

Calculation of NPV

Project A

Cash inflows

Project B

Cash inflows

Calculation of IRR

Project A

Cash inflows

Project B

Cash inflows

IRR = Lower rate + [Lower rate NPV /(Lower rate NPV - Higher rate NPV)]*Difference in rates

Project A = 13 + [5170/(5170+100)]*7 = 19.87%

Project B = 13 + [8476/(8476+6280)]*7 = 17.02%

Calculation of Payback Period

Project A

Cash inflows

Project B

Cash Inflows

Payback period

Project A = 3 years

Project B = 3 + [(90000-84000)/(112000-84000)] = 3.21 years

Calculation of Discounted Payback Period

Discounted cash inflows

Project A

Discounted cash inflows

Project B

Payback period

Project A = 4 years + [(30000-29740)/(35160-29740)] = 4.05 years

Project B = 4 years + [(90000-83272)/(98448-83272)] = 4.44 years

Year PVF

Project A

Cash inflows

Present Value

Project B

Cash inflows

Present Value 0 1 -30000 -30000 -90000 -90000 1 0.885 10000 8850 28000 24780 2 0.783 10000 7830 28000 21924 3 0.693 10000 6930 28000 19404 4 0.613 10000 6130 28000 17164 5 0.543 10000 5430 28000 15204 NPV 5170 8476

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