Problem $1$

Your division is considering two projects. Its WACC is $10\%,$ and the projects' after$-$tax cash$-$flows $($in millions

A$.$ Calculate the projects' NIP Vs$,$ IRIRs, MIRRs, regular paybacks, and discounted prybacks.

b$.$ If the two projects are independent, which projeet$($s$)$ should be chosen?

c$.$ If the two projects are mutually exclusive and the WACC is $10\%,$ which project$($s$)$ should be chosen?

d$.$ Plot NPV profiles for the two projects. Identify the projects' IRIRs on the graph.

c$.$ If the WACC was $5\%,$ would this change your recommendation if the projects were matually exelusive? If the WACC was $15\%,$ would this change your recommendation? Explain your answers.

f$.$ Calculate the Crossover rate. Explain what this rate is and how it affects the choice between mutually exclusive projects.

g$.$ Is it possible for conflicts to exist between the NPV and the IRR when independent projects are being evaluated? Explain your answer.

h$.$ Now look at the regular and discounted paybacks. Which project looks better when judged by the paybacks?

i$.$ If the payback was the only method a firm used to accept or reject projects, what payback should it choose as the cutoff point, that is$,$ reject projeets if their paybacks are not below the chosen cutoIf? Is your selected cutoff based on some economic criteria, or is it more or less arbitrary? Are the cutoff criteria equally arbitrary when firms use the NPV and$/$or the IRR as the criteria? Explain.

j$.$ Define the MIRIR. What's the difference between the IRR and the MIRR, and which generally gives a better idea of the rate of return on the investment in a project? Explain.

k$.$ Based on the MIRR, which of the two projects would you recommend?

Why do most academics and financial executives regard the NP$?$ as being the single best criterion and better than the IRIR? Why do companies still calculate IRIRs? The correct answer is available