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You are considering the following two mutually exclusive projects. Both projects will be depreciated using straight-line depreciation to a zero book value over the life of the project. Neither project has any salvage value

Year

Project(A)

Project (B)

0

-$30,000

-$25,000

1

10,000

8,000

2

11,000

8,000

3

12,000

8,000

4

13,000

8,000

The required rate of return is 10%.

(a) What is the NPV for each of the projects? Which project should be accepted if NPV method is applied? Explain why.

(b) What is the IRR for each of the projects? Which project should be accepted if IRR method is applied? Explain why.

(c) What is the payback period for each of the projects? Which project should be accepted if payback period method is applied? Explain why.

(d) What is the discounted payback period for each of the projects? Which project should be accepted if discounted payback period method is applied? Explain why.

(e) What is the profitability index for each of the projects? Which project should be accepted if profitability index method is applied? Explain why.

(f) Find the crossover rate. Show the equation.

(g) Sketch the NPV profile. You must plot at least 5 points for the profile: two points on the x and y axis each, and the cross-over rate on the x axis.

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Patrina Schowalter
Patrina SchowalterLv2
28 Sep 2019

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A firm with a 13% WACC is evaluating two projects for this year's capital budget. After-tax cash flows, including depreciation, are as follows: 0 1 2 3 4 5 Project A -$3,000 $1,000 $1,000 $1,000 $1,000 $1,000 Project B -$9,000 $2,800 $2,800 $2,800 $2,800 $2,800 a. Calculate NPV for each project. Round your answers to the nearest cent. Project A $ Project B $ Calculate IRR for each project. Round your answers to two decimal places. Project A % Project B % Calculate MIRR for each project. Round your answers to two decimal places. Project A % Project B % Calculate payback for each project. Round your answers to two decimal places. Project A years Project B years Calculate discounted payback for each project. Round your answers to two decimal places. Project A years Project B years b. Assuming the projects are independent, which one or ones would you recommend? -Select-Only Project A would be accepted because NPV(A) > NPV(B).Only Project B would be accepted because NPV(B) > NPV(A).Both projects would be accepted since both of their NPV's are positive.Only Project A would be accepted because IRR(A) > IRR(B).Both projects would be rejected since both of their NPV's are negative. c. If the projects are mutually exclusive, which would you recommend? If the projects are mutually exclusive, the project with the highest positive NPV is chosen. Accept Project B.If the projects are mutually exclusive, the project with the highest positive IRR is chosen. Accept Project A.If the projects are mutually exclusive, the project with the highest positive MIRR is chosen. Accept Project A.If the projects are mutually exclusive, the project with the shortest Payback Period is chosen. Accept Project A.If the projects are mutually exclusive, the project with the highest positive IRR is chosen. Accept Project B. d. Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRR?

You have a choice between two mutually exclusive investments. Project A requires initial cash outlay of $150,000 and has projected cash flows of $100,000 for year one, $55,000 for year two, and $30,000 for year three. Meanwhile, Project B requires initial cash outlay of $100,000 and has projected cash flows of $40,000 per year for the next three years. The required rate of return is 10%.

(a)(3 points) Calculate the ordinary payback period for both projects and determine which should be accepted. Assume the target payback period is 2 years. Explain why.

(b) (4 points) Calculate the discounted payback period for both projects and determine which should be accepted. Assume the target payback period is 2 years Explain why.

(c) (3 points) Calculate the profitability index (PI) for both projects and determine which should be accepted. Explain why.

(d) (4 points) Assuming the projected cash flow is a future net income, calculate the average accounting return (AAR) for both projects and determine which should be accepted if the target average accounting return is 30%. Explain why.

Yr

Sates of Affairs

Cash Flow

Mcarthys

Cash Flow

Gotham

Cash Flow

0

-$7,500,000

-$5,000,000

-$4,000,000

1

$5,000,000

$1,000,000

$5,750,000

2

$4,500,000

$2,000,000

$5,750,000

3

$3,000,000

$3,000,000

-$1,000,000

4

-$1,000,000

$4,000,000

$0.00

5

$2,500,000

$4,000,000

6

$2,500,000

Required rate of return: 8.00%

Calculate the payback period for each project. If our required payback period is 3 years which projects will we accept?

Calculate the Net Present Value of each project. Which projects should we accept?

Calculate the Internal rate of return for each project. Which projects should be accepted?

Calculate the Modified Internal Rate of Return for each project. Which projects should be accepted?

Calculated the Profitability Index for each project. Which projects should be accepted?

If the company only has$10,000,000 for projects which project(s) should be accepted using the equivalent Annual Annuity? Report the EEA for each project?

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