Part 2 -

The second model is for a project for Gardial Fisheries. Gardial Fisheries is considering two mutually exclusive investments. The projects expected net cash flows are as follows: Expected Net Cash Flows for the 7 year Project are:

Project A $375, 300, 200, 100, 600, 600, 926 and, 200

Project B $575, 190, 190, 190, 190, 190, 190 and, 0

If each projects cost of capital is 12%, which project should be selected? If the cost of capital is 18%, what project is the proper choice?

Construct NPV profiles for Projects A and B.

What is each projects IRR?

What is the crossover rate, and what is its significance?

What is each projects MIRR at a cost of capital of 12%? At r 18%? (Hint: Consider Period 7 as the end of Project Bs life.)

What is the regular payback period for these two projects? (Hint: Excels PERCENTRANK function may not work correctly for Project A because it has nonnormal cash flows.)

At a cost of capital of 12%, what is the discounted payback period for these two projects?

What is the profitability index for each project if the cost of capital is 12

1 2 3 Gardial Fisheries is considering two mutually exclusive investments. The projects' expected net cash flows are as follows: 4 5 Expected Net Cash Flows 6 Time Project A Project B 7 0 ($375) ($575) 8 1 ($300) $190 9 2 ($200) $190 10 3 ($100) $190 11 4 $600 $190 12 5 $600 $190 13 6 14 7 $926 ($200) $190 $0 15 16 17 a. If each project's cost of capital is 12%, which project should be selected? If the cost of capital is 18%, what project is the proper choice? 18 19 @12% cost of capital @ 18% cost of capital 20 21 WACC = 12% WACC = 18% 22 Use Excel's NPV function as explained in this chapter's Tool Kit. Note that the range does not include the costs, which are added separately. 23 NPV A = NPV A = 24 25 NPV B = NPV B = 26 27 28 At a cost of capital of 12%, Project A should be selected. However, if the cost of capital rises to 18%, then the choice is reversed, and Project B should be accepted. 29 30 b. Construct NPV profiles for Projects A and B. 31 32 33 Before we can graph the NPV profiles for these projects, we must create a data table of project NPVs relative to differing costs of capital. 34 35 Project A Project B 36 37 0% 38 2% 39 4% 40 6% 41 8% 42 10% 43 12% 44 14% 45 16% 46 18% 47 20% 48 22% 49 24% 50 26% 51 28% 52 30% 53 54 c. What is each project's IRR? 55 56 We find the internal rate of return with Excel's IRR function: 57 58 IRRA Noto in the graph above that the Y axis intercepts are cou the bun proiecte' IPRC