70.2K

Verified Solution

Link Copied!

Capital budgeting criteria

A firm with a 14% WACC is evaluating two projects for thisyear's capital budget. After-tax cash flows, includingdepreciation, are as follows:

0

1

2

3

4

5

Project A	-$6,000	$2,000	$2,000	$2,000	$2,000	$2,000
Project B	-$18,000	$5,600	$5,600	$5,600	$5,600	$5,600

1. Calculate NPV for each project. Round your answers to thenearest cent.
   Project A    $   
   Project B    $  

   Calculate IRR for each project. Round your answers to twodecimal places.
   Project A      %
   Project B      %

   Calculate MIRR for each project. Round your answers to twodecimal places.
   Project A      %
   Project B      %

   Calculate payback for each project. Round your answers to twodecimal places.
   Project A      years
   Project B      years

   Calculate discounted payback for each project. Round youranswers to two decimal places.
   Project A      years
   Project B      years

2. Assuming the projects are independent, which one or ones wouldyou recommend?
   -Select-Only Project B would be accepted because NPV(B) >NPV(A). Both projects would be accepted since both of their NPV'sare positive. Only Project A would be accepted because IRR(A) >IRR(B). Both projects would be rejected since both of their NPV'sare negative.Only Project A would be accepted because NPV(A) >NPV(B).Item 11
3. If the projects are mutually exclusive, which would yourecommend?
   -Select-If the projects are mutually exclusive, the project withthe highest positive IRR is chosen. Accept Project A.If theprojects are mutually exclusive, the project with the highestpositive MIRR is chosen. Accept Project A.If the projects aremutually exclusive, the project with the shortest Payback Period ischosen. Accept Project A.If the projects are mutually exclusive,the project with the highest positive IRR is chosen. Accept ProjectB.If the projects are mutually exclusive, the project with thehighest positive NPV is chosen. Accept Project B.Item 12
4. Notice that the projects have the same cash flow timingpattern. Why is there a conflict between NPV and IRR?
   -Select-The conflict between NPV and IRR is due to the relativelyhigh discount rate.The conflict between NPV and IRR is due to thefact that the cash flows are in the form of an annuity.The conflictbetween NPV and IRR is due to the difference in the timing of thecash flows.There is no conflict between NPV and IRR.The conflictbetween NPV and IRR occurs due to the difference in the size of theprojects.Item 13