Chapter 4 Building Model Essay

685 Words Feb 19th, 2015 3 Pages
Gardial Fisheries is considering two mutually exclusive investments. The projects' expected net cash flows are as follows: Expected Net Cash Flows Time 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. If each project's cost of capital is 12%, which project should be selected? If the cost of capital is 18%, what project is the proper choice?"

@ 12% cost of capital @ 18% cost of capital Use Excel's NPV function as explained in this chapter's Tool Kit. Note that
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We find the internal rate of return with Excel's IRR function: IRR A = 18.64% Note in the graph above that the X-axis intercepts are equal to the two projects' IRRs.
IRR B = 23.92% d. What is the crossover rate, and what is its significance? Cash flow
Time differential
0 $200
1 ($490)
2 ($390) Crossover rate = 13.14%
3 ($290)
4 $410 "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"
5 $410
6 $736 value, at a cost of capital of 13.14% is: $182
7 ($200) "e. What is each project's MIRR at a cost of capital of 12%? At r = 18%? (Hint: Consider Period 7 as the end of Project B's life.)"

@ 12% cost of capital @ 18% cost of capital MIRR A = 15.43% MIRR A = 18.34% MIRR B = 17.01% MIRR B = 20.47% f. What is the regular payback period for these two projects? Project A Time period 0 1 2 3 4 5 6 7 Cash flow (375) (300) (200) (100) 600 $600 $926 ($200) Cumulative cash flow (375) (675) (875) (975) (375) 225 1,151 951 Payback 4.625 Project B Time period 0 1 2 3 4 5 6

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