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A company has a 12% WACC and is considering two mutually exclusive investments

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11-17 CAPITAL BUDGETING CRITERIA;A company has a 12% WACC and is considering two mutually exclusive investments (that cannot be repeated) with the following net cash flows;0 1 2 3 4 5 6 7;Project A -$300 -$387 -$193 -$100 $600 $600 $850 -$180;Project B -$405 $134 $134 $134 $134 $134 $134 $0;a. What is each project?s NPV?;b. What is each project?s IRR?;c. What is each project?s MIRR? (Hint: Consider Period 7 as the end of Project B?s life.);d. From your answers to parts a, b, and c, which project would be selected? If the WACC was 18%, which project would be selected?;e. Construct NPV profiles for Projects A and B.;f. Calculate the crossover rate where the tow projects? NPVs are equal.;g. What is each project?s MIRR at a WACC of 18%?;11-19 Multiple IRRS and MIRR;A mining company is deciding whether to open a strip mine, which cost $2 million. Cash inflows of $13 million would occur at the end of Year 1. The land must be returned to its natural state at a cost of $12 million, payable at the end of Year 2.;A: Plot the projects NPV profile.;B: Should the project be accepted if WACC = 10%? If WACC = 20%? Explain your reasoning.;C: Think of some other capital budgeting situations in which negative cash flows during or at the end of the projects life might lead to multiple IRRs.;D: What is the projects MIRR at WACC= 10%? At WACC = 20%? Does MIRR method lead to the same accept/reject decision for this project as the NPV method? Does the MIRR method always lead to the same accept/reject decision as NPV? (Hint: Consider mutually exclusive projects that differ in size);Additional Requirements

 

Paper#25042 | Written in 18-Jul-2015

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