A company has a 12% WACC and is considering two mutually exclusive investments (that cannot be repeated)
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 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
Step by Step Answer:
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 the full answer
Fundamentals of Financial Management
ISBN: 978-0324664553
Concise 6th Edition
Authors: Eugene F. Brigham, Joel F. Houston
Related Video
NPV stands for \"Net Present Value,\" which is a financial concept used to determine the value of an investment or project. It measures the difference between the present value of cash inflows and the present value of cash outflows over a given period of time, using a specific discount rate. To calculate the NPV of an investment, you need to first estimate the cash inflows and outflows associated with the investment, and then discount them back to their present values using a discount rate. The discount rate represents the cost of capital or the expected rate of return required by investors. The formula for calculating NPV is: NPV = sum of (cash inflows / (1 + discount rate)^t) - sum of (cash outflows / (1 + discount rate)^t) Where: Cash inflows: the expected cash received from the investment Cash outflows: the expected cash paid out for the investment Discount rate: the required rate of return or the cost of capital t: the time period in which the cash flow occurs If the NPV is positive, it means that the investment is expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a good investment. If the NPV is negative, it means that the investment is not expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a bad investment.
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