You are a financial analyst for the Hittle Company. The director of capital budgeting has asked you to analyze two proposed capital investments, Projects X and Y. Each project has a cost of $10,000, and the cost of capital for each is 12%. The projects’ expected net cash flows are as follows: Expected Net Cash Flows Year Project X Project Y 0 −$10,000 −$10,000 1 6,500 3,500 2 3,000 3,500 3 3,000 3,500 4 1,000 3,500 a. Calculate each project’s payback period, net present value (NPV), internal rate of return (IRR), modified internal rate of return (MIRR), and profitability index (PI). b. Which project or projects should be accepted if they are independent? c. Which project should be accepted if they are mutually exclusive? d. How might a change in the cost of capital produce a conflict between the NPV and IRR rankings of these two projects? Would this conflict exist if r were 5%? (Hint: Plot the NPV profiles.) e. Why does the conflict exist?
You are a financial analyst for the Hittle Company. The director of capital budgeting
has asked you to analyze two proposed capital investments, Projects X and Y. Each
project has a cost of $10,000, and the cost of capital for each is 12%. The projects’
expected net cash flows are as follows:
Expected Net Cash Flows
Year Project X Project Y
0 −$10,000 −$10,000
1 6,500 3,500
2 3,000 3,500
3 3,000 3,500
4 1,000 3,500
a. Calculate each project’s payback period,
of return (IRR), modified internal rate of return (MIRR), and profitability
index (PI).
b. Which project or projects should be accepted if they are independent?
c. Which project should be accepted if they are mutually exclusive?
d. How might a change in the cost of capital produce a conflict between the NPV
and IRR rankings of these two projects? Would this conflict exist if r were 5%?
(Hint: Plot the NPV profiles.)
e. Why does the conflict exist?
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