Your division is considering two investment projects, each of which requires an up-front expenditure of $25 million.

Question:

Your division is considering two investment projects, each of which requires an up-front expenditure of $25 million. You estimate that the cost of capital is 10 percent and that the investments will produce the following after-tax cash flows (in millions of dollars):

a. What is the regular payback period for each of the projects?

b. What is the discounted payback period for each of the projects?

c. If the two projects are independent and the cost of capital is 10 percent, which project or projects should the firm undertake?

d. If the two projects are mutually exclusive and the cost of capital is 5 percent, which project should the firm undertake?

e. If the two projects are mutually exclusive and the cost of capital is 15 percent, which project should the firm undertake?

f. What is the crossover rate?

g. If the cost of capital is 10 percent, what is the modified IRR (MIRR) of each project?

Project B 20 Project A Year 1 10 10 15 20 4

Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of... Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...