A company has a 12% WACC and is considering two mutually exclusive investments (that cannot be repeated) with the following cash flows:
0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 |
Project A | -$300 | -$387 | -$193 | -$100 | $600 | $600 | $850 | -$180 |
Project B | -$400 | $135 | $135 | $135 | $135 | $135 | $135 | $0 |
What is each project's NPV? Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest cent.
Project A: $
Project B: $
What is each project's IRR? Do not round intermediate calculations. Round your answers to two decimal places.
Project A: %
Project B: %
What is each project's MIRR? (Hint: Consider Period 7 as the end of Project B's life.) Do not round intermediate calculations. Round your answers to two decimal places.
Project A: %
Project B: %
From your answers to parts a-c, which project would be selected?
-Select-Project AProject BItem 7
If the WACC was 18%, which project would be selected?
-Select-Project AProject BItem 8
Construct NPV profiles for Projects A and B. If an amount is zero, enter 0. Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest cent.
Discount Rate | NPV Project A | NPV Project B |
0% | $ | $ |
5 | ||
10 | ||
12 | ||
15 | ||
18.1 | ||
24.83 |
Calculate the crossover rate where the two projects' NPVs are equal. Do not round intermediate calculations. Round your answer to two decimal places.
%
What is each project's MIRR at a WACC of 18%? Do not round intermediate calculations. Round your answers to two decimal places.
Project A: %
Project B: %
a. Calculation of NPV of the Project
Year | Project A | PVF@12 % | PV | Project B | PVF@12 % | PV |
0 | -300 | 1.00 | -300.00 | -400.00 | 1.00 | -400.00 |
1 | -387 | 0.89 | -345.54 | 135.00 | 0.89 | 120.54 |
2 | -193 | 0.80 | -153.86 | 135.00 | 0.80 | 107.62 |
3 | -100 | 0.71 | -71.18 | 135.00 | 0.71 | 96.09 |
4 | 600 | 0.64 | 381.31 | 135.00 | 0.64 | 85.79 |
5 | 600 | 0.57 | 340.46 | 135.00 | 0.57 | 76.60 |
6 | 850 | 0.51 | 430.64 | 135.00 | 0.51 | 68.40 |
7 | -180 | 0.45 | -81.42 | 0.00 | 0.45 | 0.00 |
NPV | 200.408 | NPV | 155.040 |
b. IRR of the Project A and B
Year | Project A | Project B |
0 | -300 | -400.00 |
1 | -387 | 135.00 |
2 | -193 | 135.00 |
3 | -100 | 135.00 |
4 | 600 | 135.00 |
5 | 600 | 135.00 |
6 | 850 | 135.00 |
7 | -180 | 0.00 |
IRR | 18.10% | 24.83% |
c. Project A
Year | Project A | Amount reinvested @ 12% | Amount to be receive after 7th Year | Actual Amount Receipt/ Payment |
0 | -300 | -300 | ||
1 | -387 | -387 | ||
2 | -193 | -193 | ||
3 | -100 | -100 | ||
4 | 600 | 600 | 843 | 0 |
5 | 600 | 600 | 752.60 | 0 |
6 | 850 | 850 | 952 | 0 |
7 | -180 | 2367.60 | ||
MIRR | 15.92% |
Project B
Year | Project B | Amount reinvested @ 12% | Amount to be receive after 7th Year | Actual Amount Receipt/ Payment |
0 | -400.00 | -400 | ||
1 | 135.00 | 135.00 | 266.47 | 0 |
2 | 135.00 | 135.00 | 237.92 | 0 |
3 | 135.00 | 135.00 | 212.43 | 0 |
4 | 135.00 | 135.00 | 189.67 | 0 |
5 | 135.00 | 135.00 | 169.34 | 0 |
6 | 135.00 | 135.00 | 151.20 | 0 |
7 | 0.00 | 0.00 | 1227.02 | |
MIRR | 17.37% |
From the answer in Part a - c, Project B is more beneficial because IRR of the Project B is more. NPV of Project A is more than Project A but investment is also more in Project A. Therefore in my opinion Project B is better to select.
NPV Calculation using 18 % WACC
Year | Project A | PVF @ 18% | Present Value | Year | Project B | PVF @ 18% | Present Value |
0 | -300 | 1 | -300 | 0 | -400.00 | 1 | -400 |
1 | -387 | 0.85 | -328.0 | 1 | 135.00 | 0.85 | 114.4 |
2 | -193 | 0.72 | -138.6 | 2 | 135.00 | 0.72 | 97.0 |
3 | -100 | 0.61 | -60.9 | 3 | 135.00 | 0.61 | 82.2 |
4 | 600 | 0.52 | 309.5 | 4 | 135.00 | 0.52 | 69.6 |
5 | 600 | 0.44 | 262.3 | 5 | 135.00 | 0.44 | 59.0 |
6 | 850 | 0.37 | 314.9 | 6 | 135.00 | 0.37 | 50.0 |
7 | -180 | 0.31 | -56.5 | 7 | 0.00 | 0.31 | 0.0 |
NPV | 2.66 | NPV | 72.18 |
When the WACC is 18 % then Project B should be selected because NPV of the Project B is more and Investment is also low in Project B.
e. NPV with Different Discount Rates
Discount Rate | NPV Project A | NPV Project B |
0% | 890 | 410 |
5% | 540.09 | 285.22 |
10% | 283.34 | 187.96 |
12% | 200.41 | 155.04 |
15% | 92.96 | 110.91 |
18.10% | 0 | 70.97 |
24.83% | -153.7 | 0 |
f) At Discount Rate = 14% , NPV of both the Project are same
Year | Project A | PVF @ 14% | Present Value | Year | Project B | PVF @ 14% | Present Value |
0 | -300 | 1 | -300 | 0 | -400.00 | 1 | -400 |
1 | -387 | 0.876 | -339.2 | 1 | 135.00 | 0.876 | 118.3 |
2 | -193 | 0.768 | -148.2 | 2 | 135.00 | 0.768 | 103.7 |
3 | -100 | 0.673 | -67.3 | 3 | 135.00 | 0.673 | 90.9 |
4 | 600 | 0.590 | 354.0 | 4 | 135.00 | 0.590 | 79.7 |
5 | 600 | 0.517 | 310.3 | 5 | 135.00 | 0.517 | 69.8 |
6 | 850 | 0.453 | 385.2 | 6 | 135.00 | 0.453 | 61.2 |
7 | -180 | 0.397 | -71.5 | 7 | 0.00 | 0.397 | 0.0 |
NPV | 123.24 | NPV | 123.54 |
g) MIRR of Project A using 18% WACC
Year | Project A | Amount reinvested @ 18% | Amount to be receive after 7th Year | Actual Amount Receipt/ Payment |
0 | -300 | -300 | ||
1 | -387 | -387 | ||
2 | -193 | -193 | ||
3 | -100 | -100 | ||
4 | 600 | 600 | 985.8192 | 0 |
5 | 600 | 600 | 835.44 | 0 |
6 | 850 | 850 | 1396.5772 | 0 |
7 | -180 | 3037.836 | ||
MIRR | 20.80% |
MIRR Project B using 18 % WACC
Year | Project B | Amount reinvested @ 18% | Amount to be receive after 7th Year | Actual Amount Receipt/ Payment |
0 | -400 | -400 | ||
1 | 135 | 135 | 364.44 | 0 |
2 | 135 | 135 | 308.85 | 0 |
3 | 135 | 135 | 261.73 | 0 |
4 | 135 | 135 | 221.81 | 0 |
5 | 135 | 135 | 187.97 | 0 |
6 | 135 | 135 | 159.30 | 0 |
7 | 0 | 0 | 0.00 | 1504.11 |
MIRR | 20.83% |
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