You are a financial analyst for the Waffle Company. The director of capital budgeting has asked you to analyze two proposed capital investments, Projects A and B. Each project has a cost of $50,000, and the cost of capital for each is 10%. The projects’ expected net cash flows are as follows: Expected Net Cash Flows Year Project A Project B 0 ($50,000) ($50,000) 1 25,000 15,000 2 20,000 15,000 3 10,000 15,000 4 5,000 15,000 5 5,000 15,000 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). Which project will you select if your decision was based solely on the project’s payback period? Which project or projects should be accepted if they are independent?
You are a financial analyst for the Waffle Company. The director of capital budgeting has asked you to analyze two proposed capital investments, Projects A and B. Each project has a cost of $50,000, and the cost of capital for each is 10%. The projects’ expected net cash flows are as follows: Expected Net Cash Flows Year Project A Project B 0 ($50,000) ($50,000) 1 25,000 15,000 2 20,000 15,000 3 10,000 15,000 4 5,000 15,000 5 5,000 15,000 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). Which project will you select if your decision was based solely on the project’s payback period? Which project or projects should be accepted if they are independent?
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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Question
You are a financial analyst for the Waffle Company. The director of capital budgeting has asked you to analyze two proposed capital investments, Projects A and B. Each project has a cost of $50,000, and the cost of capital for each is 10%.
The projects’ expected net cash flows are as follows:
|
|
Expected Net Cash Flows
|
|
|
Year
|
Project A
|
Project B
|
|
0
|
($50,000)
|
($50,000)
|
|
1
|
25,000
|
15,000
|
|
2
|
20,000
|
15,000
|
|
3
|
10,000
|
15,000
|
|
4
|
5,000
|
15,000
|
|
5
|
5,000
|
15,000
|
- 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). - Which project will you select if your decision was based solely on the project’s payback period?
- Which project or projects should be accepted if they are independent?
- 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 6%? (Hint: Plot the NPV profiles.)
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