Question

Gardial Fisheries is considering two mutually exclusive investments. The projects' expected net cash flows are as follows:

Expected Net Cash Flows

Time Project A Project B

0 ($375) ($575)

1 ($300) $190

2 ($200) $190

3 ($100) $190

4 $600 $190

5 $600 $190

6 $926 $190

7 ($200) $0

a. If each project's cost of capital is 12%, which project should be selected? If the cost of capital is 18%, what project is the proper choice?

@ 12% cost of capital @ 18% cost of capital

Use Excel's NPV function as explained in this chapter's Tool Kit. Note that the range does not include the costs, which are added separately.

WACC = 12% WACC = 18%

NPV A = NPV A =

NPV B = NPV B =

c. What is each project's IRR?

We find the internal rate of return with Excel's IRR function:

IRR A =

Note in the graph above that the X-axis intercepts are equal to the two projects' IRRs.

IRR B =

e. What is each project's MIRR at a cost of capital of 12%? At r = 18%? Hint: note that B is a 6-year project.

@ 12% cost of capital @ 18% cost of capital

MIRR A = MIRR A =

MIRR B = MIRR B =

f. What is the regular payback period for these two projects?

Project A

Time period 0 1 2 3 4 5 6 7

Cash flow (375) (300) (200) (100) 600 $600 $926 ($200)

Cumulative cash flow

Intermediate calculation for payback

Payback using intermediate calculations

Project B

Time period 0 1 2 3 4 5 6 7

Cash flow

Cumulative cash flow

Intermediate calculation for payback

Payback using intermediate calculations

Payback using PERCENTRANK Ok because cash flows follow normal pattern.

g. At a cost of capital of 12%, what is the discounted payback period for these two projects?

WACC = 12%

Project A

Time period 0 1 2 3 4 5 6 7

Cash flow

Disc. cash flow

Disc. cum. cash flow

Intermediate calculation for payback

Payback using intermediate calculations

Project B

Time period 0 1 2 3 4 5 6 7

Cash flow

Disc. cash flow

Disc. cum. cash flow

Intermediate calculation for payback

Payback using intermediate calculations

Discounted Payback using PERCENTRANK Ok because cash flows follow normal pattern.

h. What is the profitability index for each project if the cost of capital is 12%?

PV of future cash flows for A:

PI of A:

PV of future cash flows for B:

PI of B:

Answer 1

1)