Question

There are two projects that the company is considering:

Project A costs -10,000 to implement today, and it brings subsequent cash flows of 5,000 at the end of year 1;

1,500 at the end of year 2;

2,100 at the end of year 3;

and 3,400 at the end of year 4.

Project B's initial cost is -10,000, and subsequent cash flows are 2,500 per year for five (5) years.

WACC is 6% for both projects.

a. Calculate NPV and IRR for each project, and decide which one to recommend. Make sure to increase decimals in output cells if using Excel.

b. Calculate MIRR for projects A and B. Which project would you recommend based on MIRR?

c. Find the crossover rate. What does this rate represent? Describe in one sentence.

Answer 1

a. Below is the calculation of NPV and IRR:

Hence, NPV of project A and B is $508.29 and $530.91 respectively. IRR of project A and B is 8.4% and 7.93% respectively.

As the NPV for project B is greater than project B, it will create more wealth. Hence, project B is recommened.

b.

Using 6% finance and re-investmnet rate MIRR for Project A and B is 7.32% and 7.1% respectively.

As, MIRR for project A is higher, firm should chose project B based on MIRR.