CAPITAL BUDGETING CRITERIA A company has a 12% WACC and is considering two mutua
ID: 2792553 • Letter: C
Question
CAPITAL BUDGETING CRITERIA
A company has a 12% WACC and is considering two mutually exclusive investments (that cannot be repeated) with the following cash flows:
What is each project's NPV? Round your answer to the nearest cent. Do not round your intermediate calculations.
Project A $
Project B $
What is each project's IRR? Round your answer to two decimal places.
Project A %
Project B %
What is each project's MIRR? (Hint: Consider Period 7 as the end of Project B's life.) Round your answer to two decimal places. Do not round your intermediate calculations.
Project A %
Project B %
From your answers to parts a-c, which project would be selected?
-Select-Project AProject BItem 7
If the WACC was 18%, which project would be selected?
-Select-Project AProject BItem 8
Construct NPV profiles for Projects A and B. Round your answers to the nearest cent. Do not round your intermediate calculations. Negative value should be indicated by a minus sign.
Calculate the crossover rate where the two projects' NPVs are equal. Round your answer to two decimal places. Do not round your intermediate calculations.
%
What is each project's MIRR at a WACC of 18%? Round your answer to two decimal places. Do not round your intermediate calculations.
Project A %
Project B %
Explanation / Answer
$146.01
Answer d)Whenever there is a conflict in ranking of projects based on NPV or IRR in case of mutually exclusive projects, it is safer to always prefer the NPV ranking due to the realistic assumptions theoretical soundness of the method.
Answer e)
$2.52
Project B should be selected being higher NPV
Answer f)
ANSWER A) PROJECT A Years cash flows PV factor @ 12% PV CF 0 -300 1 -300 1 -387 0.893 -345.591 2 -193 0.797 -153.821 3 -100 0.712 -71.2 4 600 0.636 381.6 5 600 0.567 340.2 6 850 0.507 430.95 7 -180 0.452 -81.36 NPV $200.78 PROJECT B Years cash flows PV factor @ 12% PV CF 0 -405 1 -405 1 134 0.893 119.662 2 134 0.797 106.798 3 134 0.712 95.408 4 134 0.636 85.224 5 134 0.567 75.978 6 134 0.507 67.938 7 0 0.452 0 NPV$146.01
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