Corporate Finance Week 7 assigment

.xlsx

School

Miami Dade College, Kendall *

*We aren’t endorsed by this school

Course

5140

Subject

Finance

Date

Jun 6, 2024

Type

xlsx

Pages

6

Uploaded by marildadalvno

Build a Model Chapter: 10 Problem: 23 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 @ 12% cost of capital @ 18% cost of capital WACC = 12% WACC = 18% $226.96 $18.24 $206.17 $89.54 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 relat Project A Project B $226.96 $206.17 0% $951.00 $565.00 2% $790.31 $489.27 4% $648.61 $421.01 6% $523.41 $359.29 8% $412.58 $303.35 10% $314.28 $252.50 12% $226.96 $206.17 14% $149.27 $163.85 16% $80.03 $125.10 Gardial Fisheries is considering two mutually exclusive investments. The projects' expected net cash flow a. If each project's cost of capital is 12%, which project should be selected? If the cost of capital is 18%, choice? NPV A = NPV A = 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 Project B should be accepted. $200 $400 $600 $800 $1,000 NPV Profiles NPV Project A
18% $18.24 $89.54 20% ($36.98) $56.85 22% ($86.39) $26.71 24% ($130.65) ($1.11) 26% ($170.34) ($26.85) 28% ($205.97) ($50.72) 30% ($237.98) ($72.88) c. What is each project's IRR? We find the internal rate of return with Excel's IRR function: 18.64% Note in the graph above that the X-axis intercepts are equal to t 23.92% d. What is the crossover rate, and what is its significance? Cash flow Time differential 0 $200 1 ($490) 2 ($390) Crossover rate = 13.14% 3 ($290) 4 $410 5 $410 6 $736 7 ($200) 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 proje @ 12% cost of capital @ 18% cost of capital 15.43% 18.34% 17.01% 20.47% f. What is the regular payback period for these two projects? Project A Time period 0 1 2 3 4 Cash flow ($375) ($300) ($200) ($100) $600 Cumulative cash flow ($375) ($675) ($875) ($975) ($375) Intermediate calculation for payback ($375) ($1,050) ($1,925) ($2,900) ($3,275) Payback using intermediate calculations 4.625 Project B Time period 0 1 2 3 4 Cash flow ($575) $190 $190 $190 $190 Cumulative cash flow ($575) ($385) ($195) ($5) $185 IRR A = IRR B = 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 MIRR A = MIRR A = MIRR B = MIRR B = -5% 0% 5% 10% 15 -$400 -$200 $0 $200
Intermediate calculation for payback ($575) ($960) ($1,155) ($1,160) ($975) Payback using intermediate calculations 3 Payback using PERCENTRANK 3.026 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 Cash flow -$375 -$300 -$200 -$100 $600 Disc. cash flow ($375) ($268) ($159) ($71) $381 Disc. cum. cash flow ($375) ($643) ($802) ($873) ($492) Intermediate calculation for payback ($375) ($1,018) ($1,820) ($2,694) ($3,186) Payback using intermediate calculations 5.401 Project B Time period 0 1 2 3 4 Cash flow ($575) $190 $190 $190 $190 Disc. cash flow ($575) $170 $151 $135 $121 Disc. cum. cash flow ($575) ($405) ($254) ($119) $2 Intermediate calculation for payback ($575) ($980) ($1,234) ($1,353) ($1,351) Payback using intermediate calculations iscounted Payback using PERCENTRANK 3.983 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: $601.96 PI of A: (1.61) PV of future cash flows for B: $781.17 PI of B: (1.36)
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