CAPITAL BUDGETING CRITERIA A firm with a 14% WACC is evaluating two projects for
ID: 2797701 • Letter: C
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: 4 Project M-$18,000 $6,000 $6,000 $6,000 $6,000 $6,000 Project N $54,000 $16,800 $16,800 $16,800 $16,800 $16,800 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 years years 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 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? Select Select SelectExplanation / Answer
Project N
Cumulative Cashflow = Cumulative cashflow of previous year + Cashflow of current year
Discounted Cashflow = Cashflow / 1+14^n
Discounted Cumulative Cashflow = Discounted Cumulative cashflow of previous year + Discounted Cashflow of current year
Years
Project N Cashflow
Cumulative Cashflow
Discounted Cashflow
Discounted Cumulative Cashflow
0
-18000
-18000
-18000
-18000
1
6000
-12000
5263
-12737
2
6000
-6000
4617
-8120
3
6000
0
4050
-4070
4
6000
6000
3552
-518
5
6000
12000
3116
2598
NPV at 14%
$2,279.37
IRR
19.86%
MIRR assuming finance rate as WACC and reinvestment rate as IRR
19.86%
Payback period = 2+(6000-0)/6000
3.000
Discounted Payback period = 4+(3116-2598)/3116
4.166
Project N
Cumulative Cashflow = Cumulative cashflow of previous year + Cashflow of current year
Discounted Cashflow = Cashflow / 1+14^n
Discounted Cumulative Cashflow = Discounted Cumulative cashflow of previous year + Discounted Cashflow of current year
Years
Project N Cashflow
Cumulative Cashflow
Discounted Cashflow
Discounted Cumulative Cashflow
0
-54000
-54000
-54000
-54000
1
16800
-37200
14737
-39263
2
16800
-20400
12927
-26336
3
16800
-3600
11340
-14997
4
16800
13200
9947
-5050
5
16800
30000
8725
3676
NPV at 14%
$3,224.35
IRR
16.80%
MIRR assuming finance rate as WACC and reinvestment rate as IRR
16.80%
Payback period = 3+(16800-13200)/16800
3.214
Discounted Payback period = 4+(8725-3676)/8725
4.579
For Project M:
Project N
Cumulative Cashflow = Cumulative cashflow of previous year + Cashflow of current year
Discounted Cashflow = Cashflow / 1+14^n
Discounted Cumulative Cashflow = Discounted Cumulative cashflow of previous year + Discounted Cashflow of current year
Years
Project N Cashflow
Cumulative Cashflow
Discounted Cashflow
Discounted Cumulative Cashflow
0
-18000
-18000
-18000
-18000
1
6000
-12000
5263
-12737
2
6000
-6000
4617
-8120
3
6000
0
4050
-4070
4
6000
6000
3552
-518
5
6000
12000
3116
2598
NPV at 14%
$2,279.37
IRR
19.86%
MIRR assuming finance rate as WACC and reinvestment rate as IRR
19.86%
Payback period = 2+(6000-0)/6000
3.000
Discounted Payback period = 4+(3116-2598)/3116
4.166
For Project N:
Project N
Cumulative Cashflow = Cumulative cashflow of previous year + Cashflow of current year
Discounted Cashflow = Cashflow / 1+14^n
Discounted Cumulative Cashflow = Discounted Cumulative cashflow of previous year + Discounted Cashflow of current year
Years
Project N Cashflow
Cumulative Cashflow
Discounted Cashflow
Discounted Cumulative Cashflow
0
-54000
-54000
-54000
-54000
1
16800
-37200
14737
-39263
2
16800
-20400
12927
-26336
3
16800
-3600
11340
-14997
4
16800
13200
9947
-5050
5
16800
30000
8725
3676
NPV at 14%
$3,224.35
IRR
16.80%
MIRR assuming finance rate as WACC and reinvestment rate as IRR
16.80%
Payback period = 3+(16800-13200)/16800
3.214
Discounted Payback period = 4+(8725-3676)/8725
4.579
Answer a.
NPV for Project M = $2279.37
NPV for Project N = $3224.35
IRR for Project M = 19.86%
IRR for Project N = 16.80%
MIRR for Project M = 19.86%
MIRR for Project N = 16.80%
Payback period for Project M = 3 years
Payback period for Project N = 3.214 years
Discounted Payback period for Project M = 4.166 years
Discounted Payback period for Project N = 4.579 years
Answer b.
Assuming the project are independent, both the Project M and Project N should be accepted.
Answer c.
If the projects are mutually exclusive, Project N should be selected as it has higher NPV among the two.
Answer d.
The decision to accept project depends on NPV and doesnt stand on IRR and thus IRR greater than WACC should be accepted which is true in this case for both the projects.
Based on the details given please see the schedule below for NPV, IRR, MIRR, Payback period and discounted payback period:For Project M:
Project N
Cumulative Cashflow = Cumulative cashflow of previous year + Cashflow of current year
Discounted Cashflow = Cashflow / 1+14^n
Discounted Cumulative Cashflow = Discounted Cumulative cashflow of previous year + Discounted Cashflow of current year
Years
Project N Cashflow
Cumulative Cashflow
Discounted Cashflow
Discounted Cumulative Cashflow
0
-18000
-18000
-18000
-18000
1
6000
-12000
5263
-12737
2
6000
-6000
4617
-8120
3
6000
0
4050
-4070
4
6000
6000
3552
-518
5
6000
12000
3116
2598
NPV at 14%
$2,279.37
IRR
19.86%
MIRR assuming finance rate as WACC and reinvestment rate as IRR
19.86%
Payback period = 2+(6000-0)/6000
3.000
Discounted Payback period = 4+(3116-2598)/3116
4.166
For Project N:
Project N
Cumulative Cashflow = Cumulative cashflow of previous year + Cashflow of current year
Discounted Cashflow = Cashflow / 1+14^n
Discounted Cumulative Cashflow = Discounted Cumulative cashflow of previous year + Discounted Cashflow of current year
Years
Project N Cashflow
Cumulative Cashflow
Discounted Cashflow
Discounted Cumulative Cashflow
0
-54000
-54000
-54000
-54000
1
16800
-37200
14737
-39263
2
16800
-20400
12927
-26336
3
16800
-3600
11340
-14997
4
16800
13200
9947
-5050
5
16800
30000
8725
3676
NPV at 14%
$3,224.35
IRR
16.80%
MIRR assuming finance rate as WACC and reinvestment rate as IRR
16.80%
Payback period = 3+(16800-13200)/16800
3.214
Discounted Payback period = 4+(8725-3676)/8725
4.579
Answer a.
NPV for Project M = $2279.37
NPV for Project N = $3224.35
IRR for Project M = 19.86%
IRR for Project N = 16.80%
MIRR for Project M = 19.86%
MIRR for Project N = 16.80%
Payback period for Project M = 3 years
Payback period for Project N = 3.214 years
Discounted Payback period for Project M = 4.166 years
Discounted Payback period for Project N = 4.579 years
Answer b.
Assuming the project are independent, both the Project M and Project N should be accepted.
Answer c.
If the projects are mutually exclusive, Project N should be selected as it has higher NPV among the two.
Answer d.
The decision to accept project depends on NPV and doesnt stand on IRR and thus IRR greater than WACC should be accepted which is true in this case for both the projects.
Based on the details given please see the schedule below for NPV, IRR, MIRR, Payback period and discounted payback period:
For Project M:
Project N
Cumulative Cashflow = Cumulative cashflow of previous year + Cashflow of current year
Discounted Cashflow = Cashflow / 1+14^n
Discounted Cumulative Cashflow = Discounted Cumulative cashflow of previous year + Discounted Cashflow of current year
Years
Project N Cashflow
Cumulative Cashflow
Discounted Cashflow
Discounted Cumulative Cashflow
0
-18000
-18000
-18000
-18000
1
6000
-12000
5263
-12737
2
6000
-6000
4617
-8120
3
6000
0
4050
-4070
4
6000
6000
3552
-518
5
6000
12000
3116
2598
NPV at 14%
$2,279.37
IRR
19.86%
MIRR assuming finance rate as WACC and reinvestment rate as IRR
19.86%
Payback period = 2+(6000-0)/6000
3.000
Discounted Payback period = 4+(3116-2598)/3116
4.166
For Project N:
Project N
Cumulative Cashflow = Cumulative cashflow of previous year + Cashflow of current year
Discounted Cashflow = Cashflow / 1+14^n
Discounted Cumulative Cashflow = Discounted Cumulative cashflow of previous year + Discounted Cashflow of current year
Years
Project N Cashflow
Cumulative Cashflow
Discounted Cashflow
Discounted Cumulative Cashflow
0
-54000
-54000
-54000
-54000
1
16800
-37200
14737
-39263
2
16800
-20400
12927
-26336
3
16800
-3600
11340
-14997
4
16800
13200
9947
-5050
5
16800
30000
8725
3676
NPV at 14%
$3,224.35
IRR
16.80%
MIRR assuming finance rate as WACC and reinvestment rate as IRR
16.80%
Payback period = 3+(16800-13200)/16800
3.214
Discounted Payback period = 4+(8725-3676)/8725
4.579
Answer a.
NPV for Project M = $2279.37
NPV for Project N = $3224.35
IRR for Project M = 19.86%
IRR for Project N = 16.80%
MIRR for Project M = 19.86%
MIRR for Project N = 16.80%
Payback period for Project M = 3 years
Payback period for Project N = 3.214 years
Discounted Payback period for Project M = 4.166 years
Discounted Payback period for Project N = 4.579 years
Answer b.
Assuming the project are independent, both the Project M and Project N should be accepted.
Answer c.
If the projects are mutually exclusive, Project N should be selected as it has higher NPV among the two.
Answer d.
The decision to accept project depends on NPV and doesnt stand on IRR and thus IRR greater than WACC should be accepted which is true in this case for both the projects.
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