| Project 2: Capital Budgeting |
| Your division is considering two projects. Its WACC is 10%, and the projects' after-tax cash flows (in millions |
| of dollars) would be as follows: |
| | | Expected Cash Flows |
| | Time | Project A | Project B |
| | 0 | ($30) | ($30) |
| | 1 | $5 | $20 |
| | 2 | $10 | $10 |
| | 3 | $15 | $8 |
| | 4 | $20 | $6 |
| 1. Calculate the projects' NPVs, IRRs, MIRRs, regular paybacks, and discounted paybacks. |
| WACC = | 10% |
| NPVA = |
| NPVB = |
| We find the internal rate of return with Excel's IRR function: |
| IRRA = |
| IRRB = |
| We find the modified internal rate of return with Excel's MIRR function using the 10% WACC: |
| MIRRA = |
| MIRRB = |
| Project A |
| | Time period: | 0 | 1 | 2 | 3 | 4 |
| | Cash flow: | (30) | 5 | 10 | 15 | 20 |
| | Cumulative cash flow: |
| | PaybackA: |
| Project B |
| | Time period: | 0 | 1 | 2 | 3 | 4 |
| | Cash flow: | (30) | 20 | 10 | 8 | 6 |
| | Cumulative cash flow: |
| | PaybackB: |
| Project A |
| | Time period: | 0 | 1 | 2 | 3 | 4 |
| | Cash flow: | (30) | 5 | 10 | 15 | 20 |
| | Disc. cash flow: |
| | Disc. cum. cash flow: |
| | Discounted PaybackA: |
| Project B |
| | Time period: | 0 | 1 | 2 | 3 | 4 |
| | Cash flow: | (30) | 20 | 10 | 8 | 6 |
| | Disc. cash flow: |
| | Disc. cum. cash flow: |
| | Discounted PaybackB: |
| 2. If the two projects are independent, which project(s) should be chosen? |
| 3. If the two projects are mutually exclusive and the WACC is 10%, which project(s) should be chosen? |
| 4. If the WACC was 5%, would this change your recommendation if the projects were mutually exclusive? |
| 5. If the WACC was 15%, would this change your recommendation? Explain your answers. |
| 6. If the payback was the only method a firm used to accept or reject projects, in your opinion how would you |
| determine what is a "good" payback period? |
| 7. What's the difference between the IRR and the MIRR, and which generally gives a better |
| idea of the rate of return on the investment in a project? Explain. |
| 8. Why do most academics regard the NPV as being the single best criterion and |
| better than the IRR? Why do companies still calculate IRRs? |
mely1999
ExcelProject2FIN3403.xlsx
