CAPITAL BUDGETING CRITERIA A firm with a 14% WACC is evaluating two projects for

Question

CAPITAL BUDGETING CRITERIA A firm with a 14% WACC is evaluating two projects for this year's capital budget. After-tax cash flows, including depreciation, are as follows Project M-$15,000 $5,000 Project N-$45,000$14,000 $5,000 $14,000 $5,000 14,000 $5,000 14,000 $5,000 14,000 a. Calculate NPV for each project. Round your answers to the nearest cent. Do not round your intermediate calculations. Project M * Project N Calculate IRR for each project. Round your answers to two decimal places. Do not round your intermediate calculations. Project M Project N _ Calculate MIRR for each project. Round your answers to two decimal places. Do not round your intermediate calculations. Project M Project N_ Calculate payback for each project. Round your answers to two decimal places. Do not round your intermediate calculations. Project M_ Project N _ Calculate discounted payback for each project. Round your answers to two decimal places. Do not round your intermediate calculations. Project M Project N - years years years years b. Assuming the projects are independent, which one(s) would you recommend? c. If the projects are mutually exclusive, which would you recommend? d. Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRR?

Explanation / Answer

` calculation of the net present value project m 1 years 1 2 3 4 5 2 cash flows 5000 5000 5000 5000 5000 3 PVRF at 14 % 0.8772 0.7695 0.6750 0.5921 0.5194 4 present value cash flows ( 2 * 3 ) 4386 3847 3375 2960 2597 5 total present value 17165 6 initial cash outlay 15000 7 net present value ( 5 - 6 ) 2165 project n 1 years 1 2 3 4 5 2 cash flows 14000 14000 14000 14000 14000 3 PVRF at 14 % 0.8772 0.7695 0.6750 0.5921 0.5194 4 present value cash flows ( 2 * 3 ) 12281 10773 9450 8289 7271 5 total present value 48063 6 initial cash outlay 45000 7 net present value ( 5 - 6 ) 3063 project m 2165 project n 3036 a -2 calculation of the internal rate of return project m years 0 1 2 3 4 5 cash flows -15000 5000 5000 5000 5000 5000 internal rate of return using excel .=irr( cash flows from year 0 to 5 ) 19.86% project n years 0 1 2 3 4 5 cash flows -45000 14000 14000 14000 14000 14000 internal rate of return using excel .=irr( cash flows from year 0 to 5 ) 16.80% a - 3 calculation of the modified internal rate of return project m wacc rate 14% irr rate 19.86% years 0 1 2 3 4 5 cash flows -15000 5000 5000 5000 5000 5000 modified internal rate of return using excel .=mirr(cash flows from year 0 to 5, irr rate , wacc rate ) 17.12% project n wacc rate 14% irr rate 16.80% years 0 1 2 3 4 5 cash flows -45000 14000 14000 14000 14000 14000 modified internal rate of return using excel .=mirr(cash flows from year 0 to 5, irr rate , wacc rate ) 15.51% a - 4 calculation of the payback period project m years 1 2 3 4 5 cash flows 5000 5000 5000 5000 5000 cumulative cash flows 5000 10000 15000 20000 25000 payback period is the time required to collect the initial cash outlay payback period 3 years project n years 1 2 3 4 5 cash flows 14000 14000 14000 14000 14000 cumulative cash flows 14000 28000 42000 56000 70000 payback period is the time required to collect the initial cash outlay initial cash outlay 45000 cumulative cash flows till 3 rd year 42000 remaining cash flows to be collected in 4 th year 45000-42000 3000 time required to calculate the cash flows in 4 th year 3000/14000 0.21 payback period 3 years + 0.21 years 3.21 years 1 - e calculation of the discounted payback period project m years 1 2 3 4 5 present value cash flows 4386 3847 3375 2960 2597 cumulative cash flows 4386 8233 11608 14569 17165 payback period is the time required to collect the initial cash outlay initial cash outlay 15000 cumulative cash flows till 4 rd year 14569 remaining cash flows to be collected in 5 th year 15000-14569 431 time required to calculate the cash flows in 5 th year 431/2597 0.17 payback period 4 years + 0.17 years 4.17 years project n years 1 2 3 4 5 present value cash flows 12281 10773 9450 8289 7271 cumulative cash flows 12281 23053 32503 40792 48063 payback period is the time required to collect the initial cash outlay initial cash outlay 45000 cumulative cash flows till 4 rd year 40792 remaining cash flows to be collected in 5 th year 45000-40792 4208 time required to calculate the cash flows in 5 th year 4208/7271 0.58 payback period 4 years + 0.58 years 4.58 years b if the projects are independent , then the project with high net present value shall be accepted in this case the project n shall be accepted as its net present value is high c if the projects are mutually exclusive , then the project with high internal rate of return shall be accepted in this case the project m shall be accepted as its internal rate of return is high d those the cash flows are having the same cash flow timing pattern , the cash flows are different for each project due to which there is a conflict between NPV and IRR

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.