You have been asked to analyze two mutually exclusive projects. Year Expected Free Cash Flows Project A Expected Free Cash Flows Project B 0 -497,500 -205,300 1 -192,000 31,500 2 -95,400 37,000 3 28,500 43,500 4 72,500 47,000 5 93,000 49,500 6 108,000 52,000 7 150,000 56,000 8 197,000 59,500 9 235,000 62,700 10 330,000 65,000 11 420,000 73,500 12 570,000 92,000 13 690,000 105,000 a) Calculate each project's NPV with a cost of capital of 8%. b) Construct the NPV profiles for Project A and Project B, and plot the NPVs of both projects on the same graph. The cost of capital should range from 0% to 30%, with increments of 2%. c) Calculate the crossover rate of the two projects. d) Calculate each project's IRR. Calculate each project's MIRR with a cost of capital of 8% and reinvestment rate of 6%. f) Calculate each project's profitability index with a cost of capital of 8%. g) Calculate each project's regular payback period. h) Calculate each project's discounted payback period with a cost of capital of 8%. At the bottom of your Excel worksheet, create the following summary table with your answers: NPV Crossover Rate IRR MIRR Payback Period in Years Discounted Payback Period in Years Profitability Index Project A Project B DEF Inc. is considering a new project. In order to undertake the new project, DEF Inc. will make use of a vacant warehouse the company owns. The warehouse has a value today of $10,500,000. The company estimates that it could sell the warehouse at the end of the project for $9,000,000. The company would need to purchase a new machine. The machine will cost $2,200,000. It will take an additional $300,000 to get the machine installed and operating. The machine will be used for the project and the project will run for 6 years. The expected salvage value of the machine at the end of the project is $500,000. The marketing department has prepared a sales forecast for the next 6 years. The forecast is shown below: Units sold Price/unit ($) Year 1 550,000 20.50 Year 2 750,000 22.00 Year 3 800,000 Year 4 620,000 Year 5 430,000 Year 6 240,000 21.00 19.50 18.00 16.00 The production department has prepared a cost forecast for the next 6 years. The forecast is shown below: Variable cost/unit ($) Year 1 10.50 Year 2 11.00 Year 3 11.50 Year 4 12.50 Year 5 Year 6 13.50 14.50 In addition to these variable costs, the company would need to hire a project manager. The project manager's contract would run for the 6 years of the project. The project manager's salary in year 1 would be $150,000. Her salary would then increase by 4% per year during the life of the project. You may assume that the salary is paid at the end of each year. The company believes that the project will require an initial investment in net operating working capital of $70,000. Thereafter, net operating working capital will be 8% of sales. The CCA rate on the machine is 34%, the tax rate is 28%, and the required rate of return is 12%. There is no CCA on the warehouse. You may assume the machine's asset class will remain open at the end of the project. The company uses the Modified Internal Rate of Return to decide whether to accept a project or not. The reinvestment rate used is 10%. What is the project's MIRR? Should the company accept or reject the project?

You have been asked to analyze two mutually exclusive projects. Year Expected Free Cash Flows Project A Expected Free Cash Flows Project B 0 -497,500 -205,300 1 -192,000 31,500 2 -95,400 37,000 3 28,500 43,500 4 72,500 47,000 5 93,000 49,500 6 108,000 52,000 7 150,000 56,000 8 197,000 59,500 9 235,000 62,700 10 330,000 65,000 11 420,000 73,500 12 570,000 92,000 13 690,000 105,000 a) Calculate each project's NPV with a cost of capital of 8%. b) Construct the NPV profiles for Project A and Project B, and plot the NPVs of both projects on the same graph. The cost of capital should range from 0% to 30%, with increments of 2%. c) Calculate the crossover rate of the two projects. d) Calculate each project's IRR. Calculate each project's MIRR with a cost of capital of 8% and reinvestment rate of 6%. f) Calculate each project's profitability index with a cost of capital of 8%. g) Calculate each project's regular payback period. h) Calculate each project's discounted payback period with a cost of capital of 8%. At the bottom of your Excel worksheet, create the following summary table with your answers: NPV Crossover Rate IRR MIRR Payback Period in Years Discounted Payback Period in Years Profitability Index Project A Project B DEF Inc. is considering a new project. In order to undertake the new project, DEF Inc. will make use of a vacant warehouse the company owns. The warehouse has a value today of $10,500,000. The company estimates that it could sell the warehouse at the end of the project for $9,000,000. The company would need to purchase a new machine. The machine will cost $2,200,000. It will take an additional $300,000 to get the machine installed and operating. The machine will be used for the project and the project will run for 6 years. The expected salvage value of the machine at the end of the project is $500,000. The marketing department has prepared a sales forecast for the next 6 years. The forecast is shown below: Units sold Price/unit ($) Year 1 550,000 20.50 Year 2 750,000 22.00 Year 3 800,000 Year 4 620,000 Year 5 430,000 Year 6 240,000 21.00 19.50 18.00 16.00 The production department has prepared a cost forecast for the next 6 years. The forecast is shown below: Variable cost/unit ($) Year 1 10.50 Year 2 11.00 Year 3 11.50 Year 4 12.50 Year 5 Year 6 13.50 14.50 In addition to these variable costs, the company would need to hire a project manager. The project manager's contract would run for the 6 years of the project. The project manager's salary in year 1 would be $150,000. Her salary would then increase by 4% per year during the life of the project. You may assume that the salary is paid at the end of each year. The company believes that the project will require an initial investment in net operating working capital of $70,000. Thereafter, net operating working capital will be 8% of sales. The CCA rate on the machine is 34%, the tax rate is 28%, and the required rate of return is 12%. There is no CCA on the warehouse. You may assume the machine's asset class will remain open at the end of the project. The company uses the Modified Internal Rate of Return to decide whether to accept a project or not. The reinvestment rate used is 10%. What is the project's MIRR? Should the company accept or reject the project?

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter10: The Basics Of Capital Budgeting: Evaluating Cash Flows

Section10.4: Internal Rate Of Return (irr)

Problem 2ST

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QUESTION #1:

ABC Inc. is debating the purchase of a new digital printer that will replace an older printer. The printer they acquired 2 years ago for $500,000 is worth $220,000 today and will have a salvage value of $80,000 after 5 more years. The printer generates revenues of $750,000 per year. The costs of operating the printer are $480,000 per year. The company currently has $110,000 invested in net operating working capital. The investment in net operating working capital will remain at this level for the remaining 5 years of the project.

The new printer will cost $830,000. It will cost $60,000 to install the new printer. The new printer will generate revenues of $1,120,000 per year. In addition, the costs of operating the new printer will be $550,000 per year. The company will have to increase its investment in net operating working capital to $175,000 at time zero. The investment in operating new working capital will remain at this level for the remaining 5 years of the project. After 5 years, the new machine will have a salvage value of $140,000.

The company has just received a report from a consulting firm that conducted an analysis on replacing the old printer with a new one. The company paid $55,000 for the report. The consultants recommended that the company replace the old printer with a new printer since the average accounting rate of return was 10.5%.

The company’s corporate tax rate is 38%, the CCA rate is 24%, and the required rate of return is 12%. Assume the asset class remains open at the end of the project.

Using Net Present Value (NPV) calculation, determine if the company should purchase the new printer. Show all work.

Q2 and Q3 will be provided as a screen shot.

Please answer using excel to confirm your calculations.
Please use finance functions included in google sheets/excel whereever it is deemed appropriate, such as PV, FV, EFFECT, PMT.. etc
Answer ALL the questions, any missed questions or calculations WILL be reported.
When rounding, DO NOT ROUND ANY CALCULATIONS (this can be easily done with functions in excel), and round the final answers to 2 decimal places.

Thank you very much!!

You have been asked to analyze two mutually exclusive projects.
Year
Expected Free Cash Flows
Project A
Expected Free Cash Flows
Project B
0
-497,500
-205,300
1
-192,000
31,500
2
-95,400
37,000
3
28,500
43,500
4
72,500
47,000
5
93,000
49,500
6
108,000
52,000
7
150,000
56,000
8
197,000
59,500
9
235,000
62,700
10
330,000
65,000
11
420,000
73,500
12
570,000
92,000
13
690,000
105,000
a) Calculate each project's NPV with a cost of capital of 8%.
b) Construct the NPV profiles for Project A and Project B, and plot the NPVs of both projects
on the same graph. The cost of capital should range from 0% to 30%, with increments of
2%.
c) Calculate the crossover rate of the two projects.
d) Calculate each project's IRR.
Calculate each project's MIRR with a cost of capital of 8% and reinvestment rate of 6%.
f) Calculate each project's profitability index with a cost of capital of 8%.
g) Calculate each project's regular payback period.
h) Calculate each project's discounted payback period with a cost of capital of 8%.
At the bottom of your Excel worksheet, create the following summary table with your answers:
NPV
Crossover Rate
IRR
MIRR
Payback Period in Years
Discounted Payback Period in Years
Profitability Index
Project A
Project B

DEF Inc. is considering a new project. In order to undertake the new project, DEF Inc. will make
use of a vacant warehouse the company owns. The warehouse has a value today of $10,500,000.
The company estimates that it could sell the warehouse at the end of the project for $9,000,000. The
company would need to purchase a new machine. The machine will cost $2,200,000. It will take an
additional $300,000 to get the machine installed and operating. The machine will be used for the
project and the project will run for 6 years. The expected salvage value of the machine at the end of
the project is $500,000.
The marketing department has prepared a sales forecast for the next 6 years. The forecast is shown
below:
Units sold
Price/unit ($)
Year 1
550,000
20.50
Year 2
750,000
22.00
Year 3
800,000
Year 4
620,000
Year 5
430,000
Year 6
240,000
21.00
19.50
18.00
16.00
The production department has prepared a cost forecast for the next 6 years. The forecast is shown
below:
Variable cost/unit ($)
Year 1
10.50
Year 2
11.00
Year 3
11.50
Year 4
12.50
Year 5
Year 6
13.50
14.50
In addition to these variable costs, the company would need to hire a project manager. The project
manager's contract would run for the 6 years of the project. The project manager's salary in year 1
would be $150,000. Her salary would then increase by 4% per year during the life of the project.
You may assume that the salary is paid at the end of each year.
The company believes that the project will require an initial investment in net operating working
capital of $70,000. Thereafter, net operating working capital will be 8% of sales.
The CCA rate on the machine is 34%, the tax rate is 28%, and the required rate of return is 12%.
There is no CCA on the warehouse. You may assume the machine's asset class will remain open at
the end of the project.
The company uses the Modified Internal Rate of Return to decide whether to accept a project or not.
The reinvestment rate used is 10%. What is the project's MIRR? Should the company accept or
reject the project?

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