Question: A company has a 12% WACC and is considering two mutually exclusive investments (that cannot be repeated) with the following net cash flows: a. What

A company has a 12% WACC and is considering two mutually exclusive investments (that cannot be repeated) with the following net cash flows:

3 4 + + -$100 $134 + $600 $134 -$300 -$387 -$193 -$405 Project A Project B $850 -$180 $600 $134 $0 $134 $134 $134 LO

a. What is each project’s NPV?

b. What is each project’s IRR?

c. What is each project’s MIRR? (Hint: Consider Period 7 as the end of Project B’s life.)

d. From your answers to Parts a, b, and c, which project would be selected? If the WACC was 18%, which project would be selected?

e. Construct NPV profiles for Projects A and B.

f. What is each project’s MIRR at a WACC of 18%?

3 4 + + -$100 $134 + $600 $134 -$300 -$387 -$193 -$405 Project A Project B $850 -$180 $600 $134 $0 $134 $134 $134 LO

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a Using a financial calculator and entering each projects cash flows into the cash flow registers and entering IYR 12 you would calculate each projects NPV At WACC 12 Project A has the greater NPV specifically 20041 as compared to Project Bs NPV of 14593 b Using a financial calculator and entering each projects cash flows into the cash flow registers you would calculate each projects IRR IRR A 181 IRR B 240 c Here is the MIRR for Project A when WACC 12 PV costs 300 387112 1 193112 2 100112 3 180112 7 95200 TV inflows 600112 3 600112 2 850112 1 254760 MIRR is the discount rate that forces the TV of 254760 in 7 years to equal 95200 Using a financial calculator enter the following inputs N 7 PV 952 PMT 0 and FV 254760 Then solve for IYR MIRR A 1510 Here is the MIRR for Project B when WACC 12 PV costs 405 TV inflows 134112 6 134112 5 134112 4 134112 3 134112 2 134112 121793 MIRR is the discount rate that forces the TV of 121793 in 7 years to equal 405 Using a financial calculator enter the following inputs N 7 PV 405 PMT 0 and FV 121793 Then solve for IYR MIRR B 1703 d WACC 12 criteria Project A Project B NPV 20041 14593 IRR 181 240 MIRR 151 1703 The correct decision is that Project A should be chosen because NPV A NPV B At WACC 18 using your financial calculator enter the cash flows for each project ... View full answer

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