Your division is considering two projects with the following cash flows (in mill

Question

Your division is considering two projects with the following cash flows (in millions): 0 1 2 3 Project A -$20 $5 $9 $12 Project B -$13 $8 $7 $3 What are the projects' NPVs assuming the WACC is 5%? Round your answer to two decimal places. Do not round your intermediate calculations. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative value should be indicated by a minus sign. Project A $ million Project B $ million What are the projects' NPVs assuming the WACC is 10%? Round your answer to two decimal places. Do not round your intermediate calculations. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative value should be indicated by a minus sign. Project A $ million Project B $ million What are the projects' NPVs assuming the WACC is 15%? Round your answer to two decimal places. Do not round your intermediate calculations. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative value should be indicated by a minus sign. Project A $ million Project B $ million What are the projects' IRRs assuming the WACC is 5%? Round your answer to two decimal places. Do not round your intermediate calculations. Project A % Project B % What are the projects' IRRs assuming the WACC is 10%? Round your answer to two decimal places. Do not round your intermediate calculations. Project A % Project B % What are the projects' IRRs assuming the WACC is 15%? Round your answer to two decimal places. Do not round your intermediate calculations. Project A % Project B % If the WACC were 5% and A and B were mutually exclusive, which would you choose? (Hint: The crossover rate is 3.86%.) If the WACC were 10% and A and B were mutually exclusive, which would you choose? (Hint: The crossover rate is 3.86%.) If the WACC were 15% and A and B were mutually exclusive, which would you choose? (Hint: The crossover rate is 3.86%.)

Explanation / Answer

NPV and IRR can be calculated using the same function on a calculator or excel.

IRR doesn't change with change in WACC and hence it will be same for different WACC.

Select projects with higher NPV. Project B has higher NPV when WACC is 5%, 10% and 15%. Hence, select Project B.

A B 0 -20 -13 1 5 8 2 9 7 3 12 3 NPV (5%) $3.29 $3.56 NPV (10%) $1.00 $2.31 NPV (15%) -$0.96 $1.22 IRR 12.46% 21.49%

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