You are a financial analyst for the Brittle Company. The director of capital bud
ID: 2760584 • Letter: Y
Question
You are a financial analyst for the Brittle Company. The director of capital budgeting has asked you to analyze two proposed capital investments: Projects X and Y. Each project has a cost of $10,000, and the cost of capital for each is 12%. The projects’ expected net cash flows are shown in the table below.
Expected Net Cash Flows
Year Project X Project Y
0 – $10,000 $10,000
1- 6,500 3,500
2- 3,000 3,500
3- 3,000 3,500
4- 1,000 3,500
a. Use the Homework Student Workbook to calculate each project’s net present value (NPV), internal rate of return (IRR), modified internal rate of return (MIRR), and profitability index (PI).
b.Which project or projects should be accepted if they are independent?
c.Which project or projects should be accepted if they are mutually exclusive?
Explanation / Answer
1
Calculation of NPV of projects:
Project X
Project Y
Year
PVF (12%)
Cash Flows (CF)
PV = CF*PVF
Cash Flows (CF)
PV = CF*PVF
0
1.00000
$ (10,000.00)
$ (10,000.00)
$ (10,000.00)
$ (10,000.00)
1
0.89286
$ 6,500.00
$ 5,803.57
$ 3,500.00
$ 3,125.00
2
0.79719
$ 3,000.00
$ 2,391.58
$ 3,500.00
$ 2,790.18
3
0.71178
$ 3,000.00
$ 2,135.34
$ 3,500.00
$ 2,491.23
4
0.63552
$ 1,000.00
$ 635.52
$ 3,500.00
$ 2,224.31
NPV =
$ 966.01
$ 630.72
2
Calculation of IRR of projects:
Project X
Project Y
Year
Cash Flows (CF)
Cash Flows (CF)
0
$ (10,000.00)
$ (10,000.00)
1
$ 6,500.00
$ 3,500.00
2
$ 3,000.00
$ 3,500.00
3
$ 3,000.00
$ 3,500.00
4
$ 1,000.00
$ 3,500.00
IRR =
18.03%
14.96%
Formula :
=IRR()
3
Calculation of Profitability Index of projects:
Project X
Project Y
Year
PVF (12%)
Cash Flows (CF)
PV = CF*PVF
Cash Flows (CF)
PV = CF*PVF
1
0.89286
$ 6,500.00
$ 5,803.57
$ 3,500.00
$ 3,125.00
2
0.79719
$ 3,000.00
$ 2,391.58
$ 3,500.00
$ 2,790.18
3
0.71178
$ 3,000.00
$ 2,135.34
$ 3,500.00
$ 2,491.23
4
0.63552
$ 1,000.00
$ 635.52
$ 3,500.00
$ 2,224.31
Present value of Cash Inflows (A)
$ 10,966.01
$ 10,630.72
Present value of Cash Outflows (B)
$ 10,000.00
$ 10,000.00
Profitability Index = A/B =
1.10
1.06
1
Calculation of NPV of projects:
Project X
Project Y
Year
PVF (12%)
Cash Flows (CF)
PV = CF*PVF
Cash Flows (CF)
PV = CF*PVF
0
1.00000
$ (10,000.00)
$ (10,000.00)
$ (10,000.00)
$ (10,000.00)
1
0.89286
$ 6,500.00
$ 5,803.57
$ 3,500.00
$ 3,125.00
2
0.79719
$ 3,000.00
$ 2,391.58
$ 3,500.00
$ 2,790.18
3
0.71178
$ 3,000.00
$ 2,135.34
$ 3,500.00
$ 2,491.23
4
0.63552
$ 1,000.00
$ 635.52
$ 3,500.00
$ 2,224.31
NPV =
$ 966.01
$ 630.72
2
Calculation of IRR of projects:
Project X
Project Y
Year
Cash Flows (CF)
Cash Flows (CF)
0
$ (10,000.00)
$ (10,000.00)
1
$ 6,500.00
$ 3,500.00
2
$ 3,000.00
$ 3,500.00
3
$ 3,000.00
$ 3,500.00
4
$ 1,000.00
$ 3,500.00
IRR =
18.03%
14.96%
Formula :
=IRR()
3
Calculation of Profitability Index of projects:
Project X
Project Y
Year
PVF (12%)
Cash Flows (CF)
PV = CF*PVF
Cash Flows (CF)
PV = CF*PVF
1
0.89286
$ 6,500.00
$ 5,803.57
$ 3,500.00
$ 3,125.00
2
0.79719
$ 3,000.00
$ 2,391.58
$ 3,500.00
$ 2,790.18
3
0.71178
$ 3,000.00
$ 2,135.34
$ 3,500.00
$ 2,491.23
4
0.63552
$ 1,000.00
$ 635.52
$ 3,500.00
$ 2,224.31
Present value of Cash Inflows (A)
$ 10,966.01
$ 10,630.72
Present value of Cash Outflows (B)
$ 10,000.00
$ 10,000.00
Profitability Index = A/B =
1.10
1.06
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