Question 8: (10 Points) 1. A major global automaker is considering an investment

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Question 8: (10 Points) 1. A major global automaker is considering an investment opportunity with the following cash flows (in millions): Year Project A

0 -$550

1 250

2 250

3 250

The firm uses a cost of capital of 10%. a. Calculate the project’s Internal Rate of Return (IRR). Using the IRR criteria, should this project be accepted? Explain. b. Calculate the Modified Internal Rate of Return (MIRR) for the global automaker presented in Question #1 (above), and indicate if the project should be accepted using the MIRR. 2. A firm has two (2) capital projects A and B, which are under consideration for funding. Both projects cost $500 million, and have the following cash flows (in millions):

Year Project A Project B

0 -$500 -$500

1 100 400

2 200 300

3 200 200

4 400 100

Assuming that the firm’s payback cutoff is two (2) years: a. What is the payback for each project?  

b. If the projects are independent, which one should be selected? Explain.

c. If the projects are mutually-exclusive, which one should be selected? Explain.

3. A manufacturing firm is evaluating two (2) robotics systems to use in its plant to produce ignition switches for commercial vehicles. The costs and expected cash flows of both systems are shown below (in millions). If the company uses a 12% discount rate for all projects, determine which project should be purchased using the Net Present Value (NPV) method. Explain the rationale for your decision.

Year Project A Project B

0 -$15,000 -$5,000

1 2,000 1,500

2 3,500 1,500

3 3,500 1,000

4 4,000 1,000

5 3,000 2,000

Explanation / Answer

1) We can use IRR formuale in excel
The cash flows are: -550,250,250,250
=IRR(-550,250,250,250,250)
=17.27%

Since IRR is greather than the firms cost of capital of 10% we can accept the project

MIRR can be calculated using excel formuale.
MIRR(Values, finance rate,reinvestment rate)
Finance=reinvestment rate=10%

=MIRR(-550,250,250,250,10%,10%)
=14.59%

Since MIRR is greather than the cost of capital, we can accept the project

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