Universal Parts Company - Estimated Cash Flows (CF) for Projects A & B (in thousands of dollars):

Net Present Value (NPV)

(1)Determine each project's NPV.

Activity: Choose both projects if two projects are independent, and their NPVs are positive
Activity: Choose the project with the higher positive NPV if the two projects are mutually exclusive


Internal Rate of Return (IRR)

(2) Determine each project's IRR.

The internal rate of return (IRR) is that discount rate which forces the NPV of a project to equal zero. Activity: Double-click on the equation to find out how you can insert an equation.
The solution to this equation can be found using Excel's IRR function.
Activity: Choose both projects if two projects are independent, and their IRRs are higher than the WACC
Activity: Choose the project with the higher IRR in excess of WACC if the projects are mutually exclusive

Crossover Rate

(3) Draw NPV profiles for Projects A and B. At what discount rate do the profiles cross?

Modified Internal Rate of Return (MIRR)

(4) Find the MIRRs for Projects A and B.
Activity: MIRR is the internal rate of return for a series of a project's cash flows, taking into account the cost of investment and interest on reinvestment of cash.
Activity: Projects A and B's modified IRRs can be solved for by using Excel's MIRR function, entering their cash flows and using the WACC as both the discount rate and the reinvestment rate. By the MIRR criteria, Project B is preferred to Project A, which is consistent with the NPV decision.

Payback Period
(5) Find the paybacks for Projects A and B.

Transcribed Image Text:

Year CFA CF. (S1,000) (S1,000) Assumme that tax effects, depreciation, salvage values, and all operating costs have been included $100 $600 $800 $700 $500 $200 in the cash flows WACC = 10.00%