A firm with a 14% WACC is evaluating two projects for this year’s capital budget. After-tax cash flows, including depreciation, are as follows: Project A, IRR = 19.86% and Project B, IRR = 16.80% Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Project A -$6,000 $2,000 $2,000 $2,000 $2,000 $2,000 Project B -$18,000 $5,600 $5,600 $5,600 $5,600 $5,600 a) Calculate NPV, payback, and discounted payback for each project. b) Assuming the projects are independent, which one(s) would you recommend? c) If the projects are mutually exclusive, which would you recommend? d) Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRR?
A firm with a 14% WACC is evaluating two projects for this year’s capital budget. After-tax cash flows, including depreciation, are as follows: Project A, IRR = 19.86% and Project B, IRR = 16.80% Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Project A -$6,000 $2,000 $2,000 $2,000 $2,000 $2,000 Project B -$18,000 $5,600 $5,600 $5,600 $5,600 $5,600 a) Calculate NPV, payback, and discounted payback for each project. b) Assuming the projects are independent, which one(s) would you recommend? c) If the projects are mutually exclusive, which would you recommend? d) Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRR?
Chapter9: Capital Budgeting Techniques
Section: Chapter Questions
Problem 9PROB
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Question
A firm with a 14% WACC is evaluating two projects for this year’s capital budget. After-tax cash flows, including
|
|
Year 0 |
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
|
Project A |
-$6,000 |
$2,000 |
$2,000 |
$2,000 |
$2,000 |
$2,000 |
|
Project B |
-$18,000 |
$5,600 |
$5,600 |
$5,600 |
$5,600 |
$5,600 |
- a) Calculate NPV, payback, and discounted payback for each project.
- b) Assuming the projects are independent, which one(s) would you recommend?
- c) If the projects are mutually exclusive, which would you recommend?
- d) Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRR?
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