Question

(Please show calculations and formulas that are used so I can better understand and work along....

(Please show calculations and formulas that are used so I can better understand and work along. Thanks!)

GHI is considering two investment proposals. Estimated cash flows are below. Each will require an initial cash outlay, followed by several years of positive cash flows. Each project will terminate and all assets will be liquidated in year 6. GHI’s WACC is 9%.

Year

Project 1

Project 2

Initial outlay

$1,000,000

$500,000

1

$160,000

$120,000

2

$200,000

$120,000

3

$300,000

$120,000

4

$400,000

$120,000

5

$350,000

$120,000

6 included salvage

$300,000

$150,000

  1. Calculate NPV, IRR, MIRR, PI, and payback period for each project.
  2. These projects are substitutes, so GHI will choose at most one of them. What is your recommendation? Should they go with Project 1, Project 2, or neither? Explain your reasoning.

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