CAPITAL BUDGETING CRITERIA A company has a 12% WACC and is considering two mutua

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: 0 1 2 3 4 5 6 7 Project A -$300 -$387 -$193 -$100 $600 $600 $850 -$180 Project B -$405 $134 $134 $134 $134 $134 $134 $0 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? If the WACC was 18%, which project would be selected? 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. Discount Rate NPV Project A NPV Project B 0% $ $ 5 10 12 15 18.1 23.97 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

Year Project A Project B PV @ 12% Project A Present Value Project B Present Value 0 -$300.00 -$405.00 1 -$300.00 -$405.00 1 -$387.00 $134.00 0.892857143 -$345.54 $119.64 2 -$193.00 $134.00 0.797193878 -$153.86 $106.82 3 -$100.00 $134.00 0.711780248 -$71.18 $95.38 4 $600.00 $134.00 0.635518078 $381.31 $85.16 5 $600.00 $134.00 0.567426856 $340.46 $76.04 6 $850.00 $134.00 0.506631121 $430.64 $67.89 7 -$180.00 $0.00 0.452349215 -$81.42 $0.00 NPV $200.41 $145.93 IRR calculated in excel using IRR function IRR 18.10% 23.97% MIRR(range of cash flows including initial cost,12%,12%) MIRR 15.10% 17.03% which project would be selected? Project A (because it has higher NPV) Year Project A Project B PV @ 18% Project A Present Value Project B Present Value 0 -$300.00 -$405.00 1 -$300.00 -$405.00 1 -$387.00 $134.00 0.847457627 -$327.97 $113.56 2 -$193.00 $134.00 0.71818443 -$138.61 $96.24 3 -$100.00 $134.00 0.608630873 -$60.86 $81.56 4 $600.00 $134.00 0.515788875 $309.47 $69.12 5 $600.00 $134.00 0.437109216 $262.27 $58.57 6 $850.00 $134.00 0.370431539 $314.87 $49.64 7 -$180.00 $0.00 0.313925033 -$56.51 $0.00 NPV $2.66 $63.68 If the WACC was 18%, which project would be selected? Project B would be selected because it has higher NPV Construct NPV profiles for Plans A and B. Round your answers to the nearest cent. Discount Rate NPV Plan A NPV Plan B 0.00% $890.00 $399.00 5.00% $540.09 $275.14 10.00% $283.34 $178.60 12.00% $200.41 $145.93 15.00% $92.96 $102.12 18.10% -$0.09 $62.48 23.65% -$130.77 $3.07 Crossover rate Year Project A Project B Difference 0 -$300.00 -$405.00 $105.00 1 -$387.00 $134.00 -$521.00 2 -$193.00 $134.00 -$327.00 3 -$100.00 $134.00 -$234.00 4 $600.00 $134.00 $466.00 5 $600.00 $134.00 $466.00 6 $850.00 $134.00 $716.00 7 -$180.00 $0.00 -$180.00 Crossover rate = IRR 14.53% MIRR 18.05% 20.49% MIRR(range of cash flows including initial cost,18%,18%)

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