& x > Build a Model K B D E F G H 1 J 1 Build a Model 11/26/18 2 Chapter: 10 3 Problem: 23 4 5 6 Gardial Fisheries is considering two mutually exclusive investments. The projects' expected net cash flows are as follows: 7 8 Expected Net Cash Flows 9 Time Project A Project B 30 0 ($375) ($575) 11 1 ($300) $190 12 2 ($200) $190 13 3 ($100) $190 4 4 $600 $190 15 5 $600 $190 16 6 $926 $190 07 7 ($200) $0 18 19 a. each project's cost of capital is 12%, which project should be selected? If the cost of capital is 18%, what project is the 20 proper choice? 21 22 @ 12% cost of capital @ 18% cost of capital 23 Use Excel's NPV function as explained in 24 WACC - 12% WACC = 18% this chapter's Tool Kit. Note that the range 5 does not include the costs, which are added 26 NPVA NPVA separately 27 28 NPV- NPV 29 10 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, 31 and Project B should be accepted. 32 33 b. Construct NPV profiles for Projects A and B. 34 35 Before we can graph the NPV profiles for these projects, we must create a data table of project NP Va relativa to differing costs of 36 capital 37 NPV Project A Project B NPV Profiles 38 39 40 41 42 43 Project A 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% 24% 26% 28% 30% 45 46 47 48 49 50 51 52 53 54 55 56 57c. Project Cest of Capital 59 1046 15% 2046 25 309 What is each project's IRR? - Cost of Capital 56 $0 0% 57 c. What is each project's IRR? 5% 10% 15% 20% 25% 30% 58 59 We find the Internal rate of return with Excel's IRR function: 60 81 IRR Note in the graph above that the X-axin Intercepts are equal to the two projects 62 IRR 63 64 d. What is the crossover rate, and what is its significance? 65 66 Cash flow 87 Time differential 68 0 69 1 70 2 Crossover rate 75 3 72 4 The crossover rate represents the cost of 73 5 capital at which the two projects value, at a 74 6 cost of capital of 13.14% is: 75 7 76 77 78 .. What is each project's MIRR at a cost of capital of 12%? Atr=12%? Hint: note that is a 6-year project 79 @ 12% cost of capital @ 18% cost of capital 80 81 82 83 MIRRA MIRRA MIRR MIRR MIRR MIRR = 83 84 85 L What is the regular payback period for these two projecta? 86 87 ProlectA 88 Time period 0 89 Cash flow (375) 90 Cumulative cash flow 2 1 (300) 3 (100) 4 600 (200) 5 $600 6 $926 7 ($200) 2889 6 $190 7 $0 97 029 91 Intermediate calculation for payback Payback using intermediate calculations 93 94 Project 95 Time period 0 1 2 3 5 96 Cash flow $575 $190 $190 $190 $190 $190 Cumulative cash flow 98 Intermediate calculation for payback 99 Payback using Intermediate calculations 100 Payback using PERCENTRANK Ok because cash flows follow normal pattern. 401 At a cost of capital of 12%, what is the discounted payback period for these two projects ? 103 H04 WACC - 12% 105 108 Project A 107 Time period 0 1 2 3 4 5 108 Cash flow $375 $300 -$200 -$100 $600 $600 909 Disc. cash flow 110 Disc, cum, cash flow 111 Intermediate calculation for payback 112 Payback using Intermediate calculations 113 114 Projecte 115 Time period 0 1 2 3 4 5 116 Cash flow 117 Disc. cash flow 118 Disc, cum, cash flow 119 Intermediate calculation for payback 120 Payback using intermediate calculations 321 Discounted Payback using PERCENTRANK Ok because cash flows follow normal pattern 5 $926 7 $200 6 7 120 Payback using intermediate calculations 121 Discounted Payback using PERCENTRANK Ok because cash flows follow norm 122 123 h. What is the profitability Index for each project if the cost of capital is 12%? 124 125 PV of future cash flows for A: 126 PI of A: 127 128 PV of future cash flows for B: 129 PI of B: 130 131 132 133 134 135