Solutions(chapter 10,11,12,15,17)
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Ch10P23BuildaModel.xlsxBuild a Model
| Solution | 3/18/15 | |||||||
| Chapter: | 10 | |||||||
| Problem: | 23 | |||||||
| Gardial Fisheries is considering two mutually exclusive investments. The projects' expected net cash flows are as follows: | ||||||||
| Expected Net Cash Flows | ||||||||
| Time | Project A | Project B | ||||||
| 0 | ($375) | ($575) | ||||||
| 1 | ($300) | $190 | ||||||
| 2 | ($200) | $190 | ||||||
| 3 | ($100) | $190 | ||||||
| 4 | $600 | $190 | ||||||
| 5 | $600 | $190 | ||||||
| 6 | $926 | $190 | ||||||
| 7 | ($200) | $0 | ||||||
| a. If each project's cost of capital is 12%, which project should be selected? If the cost of capital is 18%, what project is the proper choice? | ||||||||
| @ 12% cost of capital | @ 18% cost of capital | |||||||
| Use Excel's NPV function as explained in this chapter's Tool Kit. Note that the range does not include the costs, which are added separately. | ||||||||
| WACC = | 12% | WACC = | 18% | |||||
| NPV A = |
DII Labs: Net Present Value of "A" discounted at a WACC of 12% | NPV A = | ||||||
|
DII Labs: Net Present Value of "A" discounted at a WACC of 18% | NPV B = | NPV B = | ||||||
| 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, and Project B should be accepted. | ||||||||
| b. Construct NPV profiles for Projects A and B. | ||||||||
| Before we can graph the NPV profiles for these projects, we must create a data table of project NPVs relative to differing costs of capital. | ||||||||
| Project A | Project B | |||||||
| 0% | ||||||||
| 2% | ||||||||
| 4% | ||||||||
| 6% | ||||||||
| 8% | ||||||||
| 10% | ||||||||
| 12% | ||||||||
| 14% | ||||||||
| 16% | ||||||||
| 18% | ||||||||
| 20% | ||||||||
| 22% | ||||||||
| 24% | ||||||||
| 26% | ||||||||
| 28% | ||||||||
| 30% | ||||||||
| c. What is each project's IRR? | ||||||||
| We find the internal rate of return with Excel's IRR function: | ||||||||
| IRR A = | Note in the graph above that the X-axis intercepts are equal to the two projects' IRRs. | |||||||
| IRR B = | ||||||||
| d. What is the crossover rate, and what is its significance? | ||||||||
| Cash flow | ||||||||
| Time | differential | |||||||
| 0 | ||||||||
|
DII Labs: The difference in cash flows between Project "A" and Project "B". | 1 | |||||||
| 2 | Crossover rate = | |||||||
|
DII Labs: The IRR for the Cash Flow Differential | 3 | |||||||
| 4 | The crossover rate represents the cost of capital at which the two projects value, at a cost of capital of 13.14% is: have the same net present value. In this scenario, that common net present | |||||||
| 5 | ||||||||
| 6 | ||||||||
| 7 | ||||||||
| e. What is each project's MIRR at a cost of capital of 12%? At r = 18%? Hint: note that B is a 6-year project. | ||||||||
| @ 12% cost of capital | @ 18% cost of capital | |||||||
| MIRR A = |
DII Labs: Use Excel's MIRR function | MIRR A = | ||||||
| MIRR B = | MIRR B = | |||||||
| f. What is the regular payback period for these two projects? | ||||||||
| Project A | ||||||||
| Time period | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 |
| Cash flow | (375) | (300) | (200) | (100) | 600 | $600 | $926 | ($200) |
| Cumulative cash flow | ||||||||
| Intermediate calculation for payback | ||||||||
| Payback using intermediate calculations | ||||||||
| Project B | ||||||||
| Time period | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 |
| Cash flow | ||||||||
| Cumulative cash flow | ||||||||
| Intermediate calculation for payback | ||||||||
| Payback using intermediate calculations | ||||||||
| Payback using PERCENTRANK | Ok because cash flows follow normal pattern. | |||||||
| g. At a cost of capital of 12%, what is the discounted payback period for these two projects? | ||||||||
| WACC = | 12% | |||||||
| Project A | ||||||||
| Time period | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 |
| Cash flow | ||||||||
| Disc. cash flow | ||||||||
| Disc. cum. cash flow | ||||||||
| Intermediate calculation for payback | ||||||||
| Payback using intermediate calculations | ||||||||
| Project B | ||||||||
| Time period | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 |
| Cash flow | ||||||||
| Disc. cash flow | ||||||||
| Disc. cum. cash flow | ||||||||
| Intermediate calculation for payback | ||||||||
| Payback using intermediate calculations | ||||||||
| Discounted Payback using PERCENTRANK | Ok because cash flows follow normal pattern. | |||||||
| h. What is the profitability index for each project if the cost of capital is 12%? | ||||||||
| PV of future cash flows for A: | ||||||||
| PI of A: | ||||||||
| PV of future cash flows for B: | ||||||||
| PI of B: | ||||||||
