Question

Your division is considering two investment projects, each of which requires an up-front expenditure of $27 million. You estimate that the cost of capital is 10% and that the investments will produce the following after-tax cash flows (in millions of dollars):

Year	Project A		Project B
1	5		20
2	10		10
3	15		8
4	20		6

1. What is the regular payback period for each of the projects? Round your answers to two decimal places.

   Project A:  years

   Project B:  years

2. What is the discounted payback period for each of the projects? Do not round intermediate calculations. Round your answers to two decimal places.

   Project A:  years

   Project B:  years

3. If the two projects are independent and the cost of capital is 10%, which project or projects should the firm undertake?

   The firm should undertake -Select-Project AProject Bboth projectsItem 5 .

4. If the two projects are mutually exclusive and the cost of capital is 5%, which project should the firm undertake?

   The firm should undertake -Select-Project AProject BItem 6 .

5. If the two projects are mutually exclusive and the cost of capital is 15%, which project should the firm undertake?

   The firm should undertake -Select-Project AProject BItem 7 .

6. What is the crossover rate? Round your answer to two decimal places.

     %

7. If the cost of capital is 10%, what is the modified IRR (MIRR) of each project? Do not round intermediate calculations. Round your answers to two decimal places.

   Project A:   %

   Project B:   %

Answer 1

		Project A	Project B
a	Regular payback	2.80	1.70
b	Discounted payback period	3.21	2.09
c	NPV at 10%	10.74	9.55	Select both
d	NPV at 5%	16.24	12.96	Select A
e	NPV at 15%	6.21	6.64	Select B
f	Crossover rate	13.53%
g	MIRR	19.61%	18.66%

a: Payback = Year in which Cumulative CF is last negative -(Last negative cumulative CF/ CF of next year
b: Discounted Payback = Year in which Discounted Cumulative CF is last negative -(Last negative discounted cumulative CF/ CF of next year)

c: Both projects can be selected since both have positive NPV.

d. Select Project A as it has higher NPV.

e. Select Project B as it has higher NPV.

f. Crossover rate is the IRR of the difference in Cash flows of the two projects.

g. MIRR is computed using MIRR function of excel.

WORKINGS