If mutually exclusive projects with normal cash flows are being analyzed, the net present value (NPV) and internalrate of return (IRR) methodsagree.Projects Y and Z are mutually exclusive projects. Their cash flows and NPV profiles are shown as follows.NPV (Dollars)Year Project Y Project Z800-$1,5000-$1,500$200$9001600Project Y$400$6002$600$300400$2004$1,000Project Z200If the weighted average cost of capital (WACC)0for each project is 6%, do the NPV and IRRmethods agree or conflict?-2000 2 4 6 8 10 12 14 16The methods agreeThe methods conflict18 20COST OF CAPITAL (Percent)A key to resolving this conflict is the assumed reinvestment rate. The NPV calculation implicitly assumes thatintermediate cash flows are reinvested at theand the IRR calculationassumes that the rate at which cash flows can be reinvested is theis usually the better decision criterion.As a result, when evaluating mutually exclusive projects, thest

Net Present Value (NPV) is the method by which an investor accepts or reject the project by…

Answered: If mutually exclusive projects with…

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter10: The Basics Of Capital Budgeting: Evaluating Cash Flows

Section: Chapter Questions

Problem 1Q: Define each of the following terms: Capital budgeting; payback period; discounted payback...

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CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE PROJECTS Project S requires an initial outlay at t = 0 of 17,000, and its expected cash flows would be 5,000 per year for 5 years. Mutually exclusive Project L requires an initial outlay at t = 0 of 30,000, and its expected cash flows would be 8,750 per year for 5 years. If both projects have a WACC of 12%, which project would you recommend? Explain.
Assume San Lucas Corporation in MAD 26-1 assigns the following probabilities to the estimated annual net cash flows: a. Compute the expected value of the annual net cash flows. b. Determine the expected net present value of the equipment, assuming a desired rate of return of 10% and the expected annual net cash flows computed in part (a). Use the present value tables (Exhibits 2 and 5) provided in the chapter in determining your answer. c. Based on your results in parts (a) and (b), should San Lucas Corporation invest in the equipment?
Project S has a cost of $10,000 and is expected to produce benefits (cash flows) of $3,000 per year for 5 years. Project L costs $25,000 and is expected to produce cash flows of $7,400 per year for 5 years. Calculate the two projects’ NPVs, IRRs, MIRRs, and PIs, assuming a cost of capital of 12%. Which project would be selected, assuming they are mutually exclusive, using each ranking method? Which should actually be selected?
Projects W and X are mutually exclusive projects. Their cash flows and NPV profiles are shown as follows. Year Project W Project X 0 –$1,000 –$1,500 1 $200 $350 2 $350 $500 3 $400 $600 4 $600 $750 0 2 4 6 8 10 12 14 16 18 20 800 600 400 200 0 -200 NPV (Dollars) DISCOUNT (REQUIRED) RATE (Percent) Project X Project W If the required rate of return for each project is 2%, do the NPV and IRR methods agree or conflict? The methods conflict. The methods agree.
Consider the following two sets of project cash flows:Project Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6DiscountRateX -903 175.6 169.8 201.4 251.5 299.2 305.2 0.1037Y -513 190.5 195.5 90.5 80.5 85.5 110.5 0.1037A) Assume that projects X and Y are mutually exclusive. The correct investment decision andthe best rational for that decision is to:i) invest in Project Y since IRRY > IRRX.ii) invest in Project Y since NPVY > NPVX.iii) neither of the above.B) What are the incremental IRR and NPV of Project X?C) Is the use of the incremental measures in B) appropriate to your evaluation of thepreferred project? Explain.D) Which is the preferred project? Explain and justify the basis for your choice.(6 marks)2) Due to the demands of the new ATO Single Tough Reporting System, a successful manufacturingcompany is assessing the introduction of a new computer system to improve regulatory reportingcompliance. The managing director wants to install a new Pay Perfect system, whereas the…
CRAYON corporation has identified the following two mutually exclusive projects: YEAR Cash flow ( A) Cash flow ( B) 0 -$300,000 -$300,000 1 68,950 135,000 2 83,900 105,500 3 93,200 75,000 4 105,600 55,600 5 115,600 45,600 What is the IRR for each of this project (range: 10-16%)? Using the IRR decision rule, which project should the company accept? How do you interpret IRR of a project? If the required return is 15%, what is the NPV of these projects? Which project will the company choose if it applies the NPV decision rule? How do you interpret NPV of a project? Calculate the Payback period and discounted pay back period of these projects! Which project should the company accept? What are the differences of payback period and discounted payback…
A company is analyzing two mutually exclusive projects, S and L, with the following cash flows: 01234 Project S-$1,000$869.10$260$5$10Project L-$1,000$0$250$420$831.87 The company's WACC is 8.5%. What is the IRR of the better project? (Hint: The better project may or may not be the one with the higher IRR.) Round your answer to two decimal places.
A company is analyzing two mutually exclusive projects, S and L, with the following cash flows: 0 1 2 3 4 Project S -$1,000 $875.58 $260 $10 $15 Project L -$1,000 $0 $250 $380 $843.71 The company's WACC is 10.0%. What is the IRR of the better project? (Hint: The better project may or may not be the one with the higher IRR.) Round your answer to two decimal places.
A Company is considering two mutually exclusive projects whose expected net cash flows are in the table below. The company's WACC is 15%. What is the NPV for Project Y? What is the NPV for Project Z? What is the IRR for Project Y? What is the IRR for Project Z? Which Project, if any, should you choose? Time Project Y Project Z 0 S (420.00) S(950.00) 1 S(572.00) $270.00 2 S(189.00) S270.00 3 S(130.00) $270.00 4 $1,300.00 $270.00 5 $720.00 $270.00 6 $980.00 $270.00 7 $(225.00) $270.00 Pleaseshow in excel I think im getting the wrong values
A company is analyzing two mutually exclusive projects, with the cash flows below. If their WACC is 8.5%, what is the IRR of each? Strictly based on IRR, which project should the company go with? Time Project A Project B 0 -$1,000 -$1,000 1 $870 $0 2 $250 $250 3 $25 $400 4 $25 $845
Calculate IRR of projects S and L, IRRS & IRRL IRRS IRRL UF Company is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and are not repeatable. WACC: 7.75% Year 0 1 2 3 4 CFS ($1,050) $700 $625 CFL ($1,050) $370 $370 $360 $360
Projects A and B have the following cash flows: End-of-Year Cash Flows 0 1 2Project A − $1,000 $1,150 $100Project B − $1,000 $100 $1,300Their cost of capital is 10%.Q UESTIO NS:a. What are the projects’ NPVs, IRRs, and MIRRs?b. Which project would each method select if the projects were mutually exclusive?

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