Question

A company has a 13% WACC and is considering two mutually exclusive investments (that cannot be...

A company has a 13% 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 -$405 $134 $134 $134 $134 $134 $134 $0

The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.

Open spreadsheet

  1. What is each project's NPV? Round your answer to the nearest cent. Do not round your intermediate calculations.

    Project A: $  

    Project B: $  

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

    Project A: %

    Project B: %

  4. From your answers to parts a-c, which project would be selected?

    _________Project AProject B

    If the WACC was 18%, which project would be selected?

    _________Project AProject B


  5. Construct NPV profiles for Projects A and B. Round your answers to the nearest cent. Do not round your intermediate calculations. Negative value should be indicated by a minus sign.

    Discount Rate NPV Project A NPV Project B
    0% $   $  
    5 $   $  
    10 $   $  
    12 $   $  
    15 $   $  
    18.1 $   $  
    23.97 $   $  
  6. Calculate the crossover rate where the two projects' NPVs are equal. Round your answer to two decimal places. Do not round your intermediate calculations.

    %

  7. What is each project's MIRR at a WACC of 18%? Round your answer to two decimal places. Do not round your intermediate calculations.

    Project A: %

    Project B: %

Homework Answers

Answer #1
Year Project A Project B B - A
0 -300 -405 -105
1 -387 134 521
2 -193 134 327
3 -100 134 234
4 600 134 -466
5 600 134 -466
6 850 134 -716
7 -180 0 180
NPV $162.48 $130.67
IRR 18.10% 23.97% 14.53%
MIRR 15.60% 17.61%
NPV (18%) $2.66 $63.68
MIRR (18%) 18.05% 20.49%

NPV, IRR and MIRR can be calculated using the same function in excel

Choose Project A as it has higher NPV for WACC = 13%

For WACC = 18%, Choose Project B as its NPV is higher now.

Crossover Rate can be calculated using IRR function on the difference in cash flows = 14.53%

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