Question

Year Project A Expected Cash Flows ($) 0 (1,250,000) 1 75,000 2 218,750 3 535,000 4 775,000 5 775,000 Year Project B Expected Cash Flows ($) 0 (1,050,000) 1 650,000 2 500,000 3 226,250 4 137,500 5 62,500 Metrics Payback Period (in years) (A)3.54 (B)1.8 Discounted payback period (in years) (A)4.58 (B)2.72 Net Present Value (NPV) (A)$160,816 (B)$151,742 Internal Rate of Return (A)18.90% (B)23.84% Profitability Index (A)1.13 (B)1.14 Modified Internal Rate of Return (MIRR) (A)17.82% (B)18.15% a). Which of the metrics would you propose and why? b). Which of the projects would you recommend. c) What will be the limitations of the chosen metrics and outline what further analysis you would recommend.

There was no specific discount rate but in the question it was noted that the required rate of return was 15%.

Answer #1

a) I would propose NPV over other metrics because NPV indicates the value added to the firm by undertaking a project, which will be reflected in the stock price over a period of time.

b) As NPV is higher for A, you should recommend Project A.

c) The biggest limitation of NPV is that it is highly sensitive to discount rates. At required return of 15%, NPV for A is higher but it could be a case that for a different required return, NPV of B could be higher.

In order to outcome this bias, we need to further evaluate the specific details about required return for each project depending on their risk.

Samantha Groves and Harry Finch are facing an important
decision. After having discussed different financial scenarios into
the wee hours of the morning, the two computer engineers felt it
was time to finalize their cash flow projections and move to the
next stage – decide which of two possible projects they should
undertake.
Both had a bachelor degree in engineering and had put in several
years as maintenance engineers in a large chip manufacturing
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Assume the following cash flows for Project A: Year 0
=$(10,000); Year 1 = $4,000; Year 2 = $3,500; Year 3 = $1,500; Year
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period; 2) the net present value; 3) the internal rate of return;
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13) Assume the following cash flows for Project A: Year 0
=$(10,000); Year 1 = $4,000; Year 2 = $3,500; Year 3 = $1,500; Year
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period; 2) the net present value; 3) the internal rate of return;
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You are analyzing a project and have prepared the following
data:
Year Cash flows
0 -$275,000
1 $ 50,000
2 $ 75,000
3 $ 95,000
4 $ 15,000
Required payback period 3 years
Required rate of return 5%
You are required to:
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Here are the expected cash flows for three projects:
Cash Flows (dollars)
Project
Year:
0
1
2
3
4
A
−
6,300
+
1,325
+
1,325
+
3,650
0
B
−
2,300
0
+
2,300
+
2,650
+
3,650
C
−
6,300
+
1,325
+
1,325
+
3,650
+
5,650
a. What is the payback period on each of the
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b. If you use a cutoff period of 2 years, which
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Project A
Project B...

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4
A -5,400 +1,100 +1,100
+3,200 0
B -1,400 0 +1,400
+2,200 +3,200
C -5,400 +1,100 +1,100
+3,200 +5,200
a. what is the payback period on each of the projects?
b. If you use a cutoff period of 2 years, which projects would
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Telesis Corp is considering a project that has the
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Year
Cash Flow
0
-$1,000
1
400
2
300
3
500
4
400
The company’s weighted average cost of capital (WACC) is
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(PI)?
A.
Payback = 3.5, IRR = 10.22%, NPV = $1260, PI=1.26
B.
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C.
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Cash Flows
Year
Project A
0
-$100.00
1
$50.00
2
$60.00
3
$10.00
4
$3.00
WACC =
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0
1
2
3
4
5
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2
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A
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$50
$40
$30
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