Maven Design Inc. is considering two investment projects, X and Y. Company’s cost of capital is 7.50% and that the investments will produce the following after-tax cash flows (in thousands of dollars): Year Project X Project Y 0 −$1,100 −$2,700 1 $550 $650 2 $600 $750 3 $100 $800 4 $100 $1,400 A. Calculate the NPV, IRR, MIRR, regular payback period, discounted payback period, and profitability index for each project. For each selection criterion, indicate the correct accept/reject decision for each project and ranking (best acceptable project). Assume a 3-year payback acceptance criterion for the company. Project X Project Y Accept/Reject Ranking NPV ($) IRR (%) MIRR (%) Payback Period (Years) Discounted PB (Years) PI B. If the two projects are independent and the cost of capital is 7.5%, which project or projects should the firm undertake based on the NPV and IRR criteria? C. If the two projects are mutually exclusive and the cost of capital is 7.5%, do you see any conflict between the decisions made by NPV and IRR criteria? If yes, what is the reason for the conflict here? [Hint: think about time and size of cash flows.]
Maven Design Inc. is considering two investment projects, X and Y. Company’s cost of capital is 7.50% and that the investments will produce the following after-tax cash flows (in thousands of dollars):
|
Year |
Project X |
Project Y |
|
0 |
−$1,100 |
−$2,700 |
|
1 |
$550 |
$650 |
|
2 |
$600 |
$750 |
|
3 |
$100 |
$800 |
|
4 |
$100 |
$1,400 |
A. Calculate the
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|
Project X |
Project Y |
Accept/Reject |
Ranking |
|
NPV ($) |
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|
IRR (%) |
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MIRR (%) |
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Payback Period (Years) |
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Discounted PB (Years) |
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PI |
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B. If the two projects are independent and the cost of capital is 7.5%, which project or projects should the firm undertake based on the NPV and IRR criteria?
C. If the two projects are mutually exclusive and the cost of capital is 7.5%, do you see any conflict between the decisions made by NPV and IRR criteria? If yes, what is the reason for the conflict here? [Hint: think about time and size of cash flows.]
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