The XTC Corporation is valuating two projects for next year. Both projects invol

Question

The XTC Corporation is valuating two projects for next year. Both projects involve the investment of $430, 000 today. The company uses a rate of return of 12.0 percent. The projects will provide the following end of the year after tax cash flows for the company: a. Calculate the payback period for both projects. b. Calculate the discounted payback period. c. Calculate the net present value (NPV) for both projects.d. Calculate the profitability index for both projects. e. Calculate the internal rate of return (IRR) for both of the projects. f. Calculate the cross-over rate for these projects and explain the explain the significance of this cross over rate if the projects are mutually exclusive. g. Calculate the modified internal rate of return (MIRR). Supplementary Problem 4 This problem does not need to be handed in but is practice for the final exam. A solution will he provided with the answer key.

Explanation / Answer

Project A Year Cash Flow Cumulative Cash Flows Discount Cumulative 0 -430000 -430000 1 -430000 -430000 1 230000 -200000 0.893 205357.1 -224643 2 179000 -21000 0.797 142697.7 -81945.2 3 124000 103000 0.712 88260.75 6315.598 4 94000 197000 0.636 59738.7 66054.3 Payback Period = 2+21000/124000 2.17 Years The payback period is 2.17 Years Discounted Payback Period 2+81945.2/88260.75 Discounted Payback Period 2.93 Years Project B Year Cash Flow Cumulative Cash Flows Discount Cumulative 0 -430000 -430000 1 -430000 -430000 1 70000 -360000 0.893 62500 -367500 2 138000 -222000 0.797 110012.8 -257487 3 240000 18000 0.712 170827.3 -86660 4 260000 278000 0.636 165234.7 78574.71 Payback Period = 2+222000/240000 2+.925 2.925 Years The payback period is 2.925 Years Discounted Payback Period 3+86660/165234.7 Discounted Payback Period 3+.524 Discounted Payback Period 3.53 Years C. NPV = Present value of Cash Inflows- Cash Outflows 230000/(1.12)^1+179000/(1.12)^2+124000/(1.12)^3+94000/(1.12)^4 230000*.893+179000*..797+124000*.712+94000*.636-430000 205357.1+142697.7+88260.75+59738.7-430000 496054.3-430000 $66,054.30 Profitability Index = Cash Inflows/ Cash Outflows 496054./430000 1.153614

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