1) Projects M and N have the following projected after-tax cash flows. The company's WACC is 9%....
Question:
1) Projects M and N have the following projected after-tax cash flows. The company's WACC is 9%.
north man
Cost ($2,000,000) ($2,200,000)
Year 1 500,000 600,000
Year 2 500,000 600,000
Year 3 500,000 600,000
Year 4 500,000 600,000
Year 5 500,000 600,000
a) What is the MIRR of each project? (Note: Since the cash inflows are the same every year, you can use the PMT button to enter the flows to create the terminal value for Step 1 of the MIRR calculation.)
b) If the projects are mutually exclusive, what decision should the company make?
c) If the projects are independent, what decision should the company make?
2) A company is considering two project opportunities for a piece of land that it currently owns. One is to open a restaurant and the other is to open a gym. The projects are mutually exclusive. Your projected after-tax cash flows are described below. If the company opens a restaurant, it would plan to sell it after 3 years. If the company opens a gym, it would plan to sell it after 6 years. The company has a weighted average cost of capital of 12%. What decision should the company make? (Use both the chain of replacement and equivalent annual annuity approaches to determine the appropriate decision.)
restaurant gym
Cost ($1,500,000) ($2,400,000)
Year 1 500,000 400,000
Year 2 750,000 600,000
Year 3 2,000,000 900,000
Year 4 1,000,000
Year 5 1,000,000
Year 6 2,500,000