Question

A firm is evaluating two projects for this year’s capital budget. Its WACC is 14%. Project A costs $5,500 and its expected cash inflows would be $2,000 per year for 5 years. Project B costs $18,800 and its expected cash inflows would be $5,600 per year for 5 years. If the projects were mutually exclusive, which one would you recommend? If the projects were independent, which one(s) would you recommend? Explain.

Answer #1

A:

Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=$2000[1-(1.14)^-5]/0.14

=$2000*3.433080969

=$6866.16

NPV=Present value of inflows-Present value of outflows

=$6866.16-$5500

=$1366.16(Approx)

B:

Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=$5600[1-(1.14)^-5]/0.14

=$5600*3.433080969

=$19225.25

NPV=Present value of inflows-Present value of outflows

=$19225.25-$18800

=$425.25(Approx).

a.Hence if projects are mutually exclusive;**A must be
accepted and B rejected having higher NPV.**

**b.**Hence if projects are
independent;**both must be accepted having positive
NPV.**

Question 1.
Bigg company is evaluating two projects for next year’s capital
budget. The after-tax cash flows (including depreciation) for each
project are the following:
Project A
Project B
Year 0
-6,000
-18,000
Year 1
2,000
5,600
Year 2
2,000
5,600
Year 3
2,000
5,600
Year 4
2,000
5,600
Year 5
2,000
5,600
Year 6
4,000
9,000
a.) If the company’s WACC is 14%, find the NPV,
IRR, payback, and discount payback for each project.
b.) If the projects are...

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S costs $17,000, and its expected cash flows would be $5,000 per
year for 5 years. Mutually exclusive Project L costs $30,000, and
its expected cash flows would be $8,750 per year for 5 years. If
both projects have a WACC of 12%, which project would you
recommend? Explain. Which project would you recommend? Explain.

Capital budgeting criteria: mutually exclusive projects. Project
S costs $17,000 and its expected cash flow would be $5,000 per year
5 years. Mutually exclusive Project L costs $30,000 and its
expected cash flow would be $8,750 per year for 5 years. If both
projects have a WACC of 12%, which project would you recommend?
Explain.
**Show Work**

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:
0
1
2
3
4
5
Project M
-$9,000
$3,000
$3,000
$3,000
$3,000
$3,000
Project N
-$27,000
$8,400
$8,400
$8,400
$8,400
$8,400
Calculate NPV for each project. Do not round intermediate
calculations. Round your answers to the nearest cent.
Project M: $
Project N: $
Calculate IRR for each project. Do not round intermediate
calculations. Round your answers to...

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Project S costs $15,000 and its expected cash flows would be
$5,500 per year for 5 years. Mutually exclusive Project L costs
$40,500 and its expected cash flows would be $10,800 per year for 5
years. If both projects have a WACC of 15%, which project would you
recommend?
Select the correct answer.
I. Both Projects S and L, since both projects have NPV's >
0.
II. Project L, since the NPVL >
NPVS....

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: 0 1 2 3 4 5 Project M -$27,000 $9,000
$9,000 $9,000 $9,000 $9,000 Project N -$81,000 $25,200 $25,200
$25,200 $25,200 $25,200 Calculate NPV for each project. Do not
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cent. Project M: $ Project N: $ Calculate IRR for each project. Do
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flows would be $4,500 per year for 5 years. Mutually exclusive
Project L costs $37,500, and its expected cash flows would be
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which project would you recommend? Explain

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:
0
1
2
3
4
5
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
Calculate NPV for each project. Round your answers to the
nearest cent. Do not round your intermediate calculations.
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Project N $
Calculate IRR for each project. Round your answers to two...

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years. If both projects have a WACC of 16%, which project would you
recommend?
Select the correct answer.
a. Project S, since the
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b. Both Projects S and L, since
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Project S costs $17,000 and its expected cash flows would be
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recommend?
Select the correct answer.
a. Project L, since the NPVL >
NPVS.
b. Both Projects S and L, since both projects have IRR's >
0....

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