Chapter 12. Chapter 12 P23 Build a Model

Expected net cash flowsTime Project A Project B

0 ($375) ($575)1 ($300) $190 2 ($200) $190 3 ($100) $190 4 $600 $190 5 $600 $190 6 $926 $190 7 ($200) $0

@ a 12% cost of capital @ a 18% cost of capital

WACC = 12% WACC = 18%

NPV A = NPV A =

NPV B = NPV B =

b. Construct NPV profiles for Projects A and B.

r Project A Project B

0%2%4%6%8%

10%12%14%16%18%

Gardial Fisheries is considering two mutually exclusive investments. The projects' expected net cash flows are as follows:

a. If you were told that each project's cost of capital was 12 percent, which project should be selected? If the cost of capital was 18 percent, what would be the proper choice?

Use Excel's NPV function as explained in this chapter's Tool Kit. Note that the range does not include the costs, which are added separately.

At a cost of capital of 12%, Project A should be selected. However, if the cost of capital rises to 18%, then the choice is reversed, and Project B should be accepted.

Before we can graph the NPV profiles for these projects, we must create a data table of project NPV relative to differing costs of capital.

20%22%24%26%28%30%

c. What is each project's IRR?We find the internal rate of return with Excel's IRR function:

Note in the graph above that the X-axis intercepts are equal to the two projects' IRRs.

e. What is the crossover rate, and what is its significance?

Cash flowTime differential

012 Crossover rate =3456 value, at a cost of capital of 13.13%, is:7

@ a 12% cost of capital @ a 18% cost of capital

f. What is the regular payback period for these two projects?

Project ATime period: 0 1 2 3 4 5 6

Cash flow: (375) (300) (200) (100) 600 $600 $926 Cumulative cash flow:

% of year required for payback:Max Row 93=Payback:

Project BTime period: 0 1 2 3 4 5 6

Cash flow: (575) 190 190 190 190 $190 $190

IRR A =

IRR B =

The crossover rate represents the cost of capital at which the two projects have the same net present value. In this scenario, that common net present

d. What is each project's MIRR at a cost of capital of 12 percent? At r = 18%? (Hint: Consider Period 7 to be the end of Project B's life.)

MIRR A = MIRR A =MIRR B = MIRR B =

Cumulative cash flow:% of year required for payback:

Payback:

g. At a cost of capital of 12%, what is the discounted payback period for these two projects?

WACC = 12%

Project ATime period: 0 1 2 3 4 5 6

Cash flow: (375) (300) (200) (100) 600 $600 $926 Disc. cash flow:

Disc. cum. cash flow:% of year required for payback:

Discounted Payback:

Project BTime period: 0 1 2 3 4 5 6

Cash flow: (575) 190 190 190 190 $190 $190 Disc. cash flow:

Disc. cum. cash flow:% of year required for payback:

Discounted Payback:

h. What is the profitability index for each project if the cost of capital is 12 percent?

PV of future cash flows for A:PI of A:

PV of future cash flows for B:PI of B:

Chapter 12. Chapter 12 P23 Build a Model

Use Excel's NPV function as explained in this chapter's Tool Kit. Note that the range does not include the costs, which are added separately.

Before we can graph the NPV profiles for these projects, we must create a data table of project NPV relative to differing costs of

Note in the graph above that the X-axis intercepts are equal to the two projects' IRRs.

7($200)

7$0

d. What is each project's MIRR at a cost of capital of 12 percent? At r = 18%? (Hint: Consider Period 7 to be the end of Project

7($200)

7$0