Capital budgeting criteria
A firm with a 14% WACC is evaluating two projects for this year's capital budget. After-tax cash flows, including depreciation, are as follows:
0 1 2 3 4 5
Project M -$6,000 $2,000 $2,000 $2,000 $2,000 $2,000 Project N -$18,000 $5,600 $5,600 $5,600 $5,600 $5,600
Calculate NPV for each project. Round your answers to the nearest cent. Do not round your intermediate calculations.
Project M $
Project N $
Calculate IRR for each project. Round your answers to two decimal places. Do not round your intermediate calculations.
Project M %
Project N %
Calculate MIRR for each project. Round your answers to two decimal places. Do not round your intermediate calculations.
Project M %
Project N %
Calculate payback for each project. Round your answers to two decimal places. Do not round your intermediate calculations.
Project M years
Project N years
Calculate discounted payback for each project. Round your answers to two decimal places. Do not round your intermediate calculations.
Project M years
Project N years
Assuming the projects are independent, which one(s) would you recommend?
-Select-Both projects would be accepted since both of their NPV's are positive.Only Project M would be accepted because IRR(M) > IRR(N).Both projects would be rejected since both of their NPV's are negative.Only Project M would be accepted because NPV(M) > NPV(N).Only Project N would be accepted because NPV(N) > NPV(M).Item 11
If the projects are mutually exclusive, which would you recommend?
-Select-If the projects are mutually exclusive, the project with the shortest Payback Period is chosen. Accept Project M.If the projects are mutually exclusive, the project with the highest positive IRR is chosen. Accept Project N.If the projects are mutually exclusive, the project with the highest positive NPV is chosen. Accept Project N.If the projects are mutually exclusive, the project with the highest positive IRR is chosen. Accept Project M.If the projects are mutually exclusive, the project with the highest positive MIRR is chosen. Accept Project M.Item 12
Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRR?
-Select-The conflict between NPV and IRR occurs due to the difference in the size of the projects.The conflict between NPV and IRR is due to the relatively high discount rate.The conflict between NPV and IRR is due to the fact that the cash flows are in the form of an annuity.The conflict between NPV and IRR is due to the difference in the timing of the cash flows.There is no conflict between NPV and IRR.
Capital budgeting criteria
A firm with a 14% WACC is evaluating two projects for this year's capital budget. After-tax cash flows, including depreciation, are as follows:
| 0 | 1 | 2 | 3 | 4 | 5 |
| Project M | -$6,000 | $2,000 | $2,000 | $2,000 | $2,000 | $2,000 |
| Project N | -$18,000 | $5,600 | $5,600 | $5,600 | $5,600 | $5,600 |
Calculate NPV for each project. Round your answers to the nearest cent. Do not round your intermediate calculations.
Project M $
Project N $
Calculate IRR for each project. Round your answers to two decimal places. Do not round your intermediate calculations.
Project M %
Project N %
Calculate MIRR for each project. Round your answers to two decimal places. Do not round your intermediate calculations.
Project M %
Project N %
Calculate payback for each project. Round your answers to two decimal places. Do not round your intermediate calculations.
Project M years
Project N years
Calculate discounted payback for each project. Round your answers to two decimal places. Do not round your intermediate calculations.
Project M years
Project N years
Assuming the projects are independent, which one(s) would you recommend?
-Select-Both projects would be accepted since both of their NPV's are positive.Only Project M would be accepted because IRR(M) > IRR(N).Both projects would be rejected since both of their NPV's are negative.Only Project M would be accepted because NPV(M) > NPV(N).Only Project N would be accepted because NPV(N) > NPV(M).Item 11
If the projects are mutually exclusive, which would you recommend?
-Select-If the projects are mutually exclusive, the project with the shortest Payback Period is chosen. Accept Project M.If the projects are mutually exclusive, the project with the highest positive IRR is chosen. Accept Project N.If the projects are mutually exclusive, the project with the highest positive NPV is chosen. Accept Project N.If the projects are mutually exclusive, the project with the highest positive IRR is chosen. Accept Project M.If the projects are mutually exclusive, the project with the highest positive MIRR is chosen. Accept Project M.Item 12
Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRR?
-Select-The conflict between NPV and IRR occurs due to the difference in the size of the projects.The conflict between NPV and IRR is due to the relatively high discount rate.The conflict between NPV and IRR is due to the fact that the cash flows are in the form of an annuity.The conflict between NPV and IRR is due to the difference in the timing of the cash flows.There is no conflict between NPV and IRR.
Related questions
Capital budgeting criteria
A company has a 11% WACC and is considering two mutually exclusive investments (that cannot be repeated) with the following cash flows:
| 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 |
| Project A | -$300 | -$387 | -$193 | -$100 | $600 | $600 | $850 | -$180 |
| Project B | -$400 | $135 | $135 | $135 | $135 | $135 | $135 | $0 |
a)What is each project's NPV? Round your answer to the nearest cent. Do not round your intermediate calculations.
Project A $
Project B $
b) What is each project's IRR? Round your answer to two decimal places.
Project A
Project B
c) What is each project's MIRR? (Hint: Consider Period 7 as the end of Project B's life.) Round your answer to two decimal places. Do not round your intermediate calculations.
Project A
Project B
e) Construct NPV profiles for Projects A and B. Round your answers to the nearest cent. Do not round your intermediate calculations. Negative value should be indicated by a minus sign.
| Discount Rate | NPV Project A | NPV Project B |
| 0% | $ | $ |
| 5 | $ | $ |
| 10 | $ | $ |
| 12 | $ | $ |
| 15 | $ | $ |
| 18.1 | $ | $ |
| 24.83 | $ | $ |
F) Calculate the crossover rate where the two projects' NPVs are equal. Round your answer to two decimal places. Do not round your intermediate calculations.
G) What is each project's MIRR at a WACC of 18%? Round your answer to two decimal places. Do not round your intermediate calculations.
Project A
Project B
Problem 11-7
Capital budgeting criteria
A firm with a 13% WACC is evaluating two projects for this year's capital budget. After-tax cash flows, including depreciation, are as follows:
| 0 | 1 | 2 | 3 | 4 | 5 |
| Project A | -$30,000 | $10,000 | $10,000 | $10,000 | $10,000 | $10,000 |
| Project B | -$90,000 | $28,000 | $28,000 | $28,000 | $28,000 | $28,000 |
Calculate NPV for each project. Round your answers to the nearest cent.
Project A $
Project B $
Calculate IRR for each project. Round your answers to two decimal places.
Project A %
Project B %
Calculate MIRR for each project. Round your answers to two decimal places.
Project A %
Project B %
Calculate payback for each project. Round your answers to two decimal places.
Project A years
Project B years
Calculate discounted payback for each project. Round your answers to two decimal places.
Project A years
Project B years
Assuming the projects are independent, which one or ones would you recommend?
If the projects are mutually exclusive, which would you recommend?
Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRR?
| Consider the following two mutually exclusive projects: |
| Year | Cash Flow (A) | Cash Flow (B) | |||||
| 0 | �$ | 345,000 | �$ | 48,500 | |||
| 1 | 50,000 | 24,500 | |||||
| 2 | 70,000 | 22,500 | |||||
| 3 | 70,000 | 20,000 | |||||
| 4 | 445,000 | 15,100 | |||||
| Whichever project you choose, if any, you require a 14 percent return on your investment. |
| a-1 | What is the payback period for each project? (Round your answers to 2 decimal places. (e.g., 32.16)) |
| Payback period | ||
| Project A | years | |
| Project B | years | |
| b-1 | What is the discounted payback period for each project? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)) |
| Discounted payback period | ||
| Project A | years | |
| Project B | years | |
| c-1 | What is the NPV for each project? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16) |
| NPV | ||
| Project A | $ | |
| Project B | $ | |
| d-1 | What is the IRR for each project? (Round your answers to 2 decimal places. (e.g., 32.16)) |
| IRR | ||
| Project A | % | |
| Project B | % | |
| e-1 | What is the profitability index for each project? (Do not round intermediate calculations and round your final answers to 3 decimal places. (e.g., 32.161)) |
Please explain how you calculated each step.
