Macro Solutions Inc., a hardware manufacturer, has experienced rapid growth. Macro is considering two new capital...
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Macro Solutions Inc., a hardware manufacturer, has experienced rapid growth. Macro is considering two new capital expenditure projects and has a weighted average cost of capital of 10 percent. Project A requires an investment of $155,000 and Project B requires an investment of $240,000. Wendy Alexander, CFO of Macro, has been asked to analyze both projects and provide a recommendation. She has compiled the following data. Year 1 Year 2 Year 3 Year 4 Project A Cash Flows $43,000 43,000 43,000 43,000 Project B Cash Flows $80,000 80,000 80,000 80,000 Instructions: 1) Calculate the IRR of each project. Show your computations. 2) Based on the IRR calculation and a capital rationing constraint of $275,000, what would you recommend regarding the projects. Explain your answer. 3) If the company has no capital rationing constraints, how would your recommendation change? 4) Calculate the payback period for both projects. Show your calculations. Assuming a four year maximum payback requirement and no other constraint, what would you recommend to the company's CFO? Explain your answer 5) Identify and explain two advantages of using NPV over IRR and one advantage of IRR over NPV. 6) Identify and explain 3 weaknesses of payback period. Macro Solutions Inc., a hardware manufacturer, has experienced rapid growth. Macro is considering two new capital expenditure projects and has a weighted average cost of capital of 10 percent. Project A requires an investment of $155,000 and Project B requires an investment of $240,000. Wendy Alexander, CFO of Macro, has been asked to analyze both projects and provide a recommendation. She has compiled the following data. Year 1 Year 2 Year 3 Year 4 Project A Cash Flows $43,000 43,000 43,000 43,000 Project B Cash Flows $80,000 80,000 80,000 80,000 Instructions: 1) Calculate the IRR of each project. Show your computations. 2) Based on the IRR calculation and a capital rationing constraint of $275,000, what would you recommend regarding the projects. Explain your answer. 3) If the company has no capital rationing constraints, how would your recommendation change? 4) Calculate the payback period for both projects. Show your calculations. Assuming a four year maximum payback requirement and no other constraint, what would you recommend to the company's CFO? Explain your answer 5) Identify and explain two advantages of using NPV over IRR and one advantage of IRR over NPV. 6) Identify and explain 3 weaknesses of payback period.
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Answer rating: 100% (QA)
1 To calculate the IRR Internal Rate of Return of each project we need to find the discount rate at which the net present value NPV of the projects cash flows becomes zero We can use the following for... View the full answer
Related Book For
Equity Asset Valuation
ISBN: 978-0470571439
2nd Edition
Authors: Jerald E. Pinto, Elaine Henry, Thomas R. Robinson, John D. Stowe, Abby Cohen
Posted Date:
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