Question

# A company has a 12% WACC and is considering two mutually exclusive investments (that cannot be...

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
1. 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: \$

2. What is each project's IRR? Do not round intermediate calculations. Round your answers to two decimal places.

Project A:   %

Project B:   %

3. 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:   %

4. 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

5. 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
6. Calculate the crossover rate where the two projects' NPVs are equal. Do not round intermediate calculations. Round your answer to two decimal places.

%

7. 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%