CAPITAL BUDGETING CRITERIA You must analyze two projects, X and Y. Each project costs $10,000, and the firm's WACC is 12%. The expected cash flows are as follows: ST-2 4 0. Project X Project Y -$10,000 -$10,000 $6,500 $3,500 $3,000 $3,500 $3,000 $3,500 $1,000 $3,500 Calculate each project's NPV, IRR, MIRR, payback, and discounted payback. b. Which project(s) should be accepted if they are independent? c. Which project(s) should be accepted if they are mutually exclusive? d. How might a change in the WACC produce a conflict between the NPV and IRR rankings of the two projects? Would there be a conflict if WACC were 5%? (Hint: Plot the NPV profiles. The crossover rate is 6.21875%.) e. Why does the conflict exist? a.
CAPITAL BUDGETING CRITERIA You must analyze two projects, X and Y. Each project costs $10,000, and the firm's WACC is 12%. The expected cash flows are as follows: ST-2 4 0. Project X Project Y -$10,000 -$10,000 $6,500 $3,500 $3,000 $3,500 $3,000 $3,500 $1,000 $3,500 Calculate each project's NPV, IRR, MIRR, payback, and discounted payback. b. Which project(s) should be accepted if they are independent? c. Which project(s) should be accepted if they are mutually exclusive? d. How might a change in the WACC produce a conflict between the NPV and IRR rankings of the two projects? Would there be a conflict if WACC were 5%? (Hint: Plot the NPV profiles. The crossover rate is 6.21875%.) e. Why does the conflict exist? a.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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h. Payback period; discounted payback
CAPITAL BUDGETING CRITERIA You must analyze two projects, X and Y. Each project costs
$10,000, and the firm's WACC is 12%. The expected cash flows are as follows.
ST-2
0.
1
2.
4
-$10,000
-$10,000
$3,000
$3,500
$1,000
$3,500
$3,000
Project X
Project Y
$6,500
$3,500
$3,500
Calculate each project's NPV, IRR, MIRR, payback, and discounted payback.
b. Which project(s) should be accepted if they are independent?
Which project(s) should be accepted if they are mutually exclusive?
d. How might a change in the WACC produce a conflict between the NPV amd IRR
rankings of the two projects? Would there be a conflict if WACC were 5%? (Hint: Plot the
NPV profiles. The crossover rate is 6.21875%.)
a.
C.
e. Why does the conflict exist?
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