A company estimates that its weighted average cost of capital (WACC) is 12.0 percent. Which of the following independent projects should the company accept? Note: there can be more than one correct answer. \begin{tabular}{|r|l|} \hline a. & The Project requires an up-front expenditure of $1M and generates an internal rate of return of 9.7%. \\ \hline b. & The Project has an internal rate of return of 10.7%. \\ \hline c. & The Project requires an initial investment of $1M and generates a net present value of $33,200. \\ \hline d. & The Project has an initial investment of $2M and an NPV of +$3,700. \\ \hline e. & The Project has a modified internal rate of return of 12.3%. \\ \hline f. & The Project has a Discounted Payback Period of 24 months. \\ \hline g. & None of the projects above should be accepted. \\ \hline \end{tabular} Answer: A company has an investment opportunity which will yield the following cash flows. Assuming the cash 2 flows occur evenly during the year, what is the payback period for this investment? Solve this manually and use the Percentrank function to solve. Year \begin{tabular}{|c|c|c|c|c|c|c|c|c|c|} \hline & \multicolumn{9}{|c|}{ Year } \\ \hline & 0 & 1 & 2 & 3 & 4 & 5 & 6 & 7 & 8 \\ \hline Cash Flow & ($30,000) & $4,000 & $4,500 & $5,000 & $5,500 & $6,000 & $6,500 & $7,000 & $7,500 \\ \hline & & & & & & & & & \\ \hline & & & & & & & & & \\ \hline & Answer: & & & & & & & & \\ \hline & & & & Yea & & & & & \\ \hline & 0 & 1 & 2 & 3 & 4 & 5 & 6 & 7 & 8 \\ \hline Cash Flow & & & & & & & & & \\ \hline Cumulative Cash Flows & & & & & & & & & \\ \hline \end{tabular} \begin{tabular}{|r|r|} \hline Manual = & \\ \hline Percentrank = & \\ \hline \end{tabular} Several ways to approach this. In this case, used conditional if statements along with min function. \begin{tabular}{|c|c|c|c|c|c|c|c|c|c|c|c|} \hline5 & \begin{tabular}{r} Calculate the IRR f \\ problem.) \end{tabular} & \begin{tabular}{l} the follo \\ Does you \end{tabular} & \begin{tabular}{l} stream \\ wer col \end{tabular} & \begin{tabular}{l} f cash fl \\ rm the in \end{tabular} & \begin{tabular}{l} ws. (The \\ plication \end{tabular} & \begin{tabular}{l} e the are \\ of your \end{tabular} & \begin{tabular}{l} ame cas \\ iswer for \end{tabular} & \begin{tabular}{l} flows as \\ he previc \end{tabular} & \begin{tabular}{l} lown in the \\ s problem \end{tabular} & revious & \\ \hline & & & & & Ye & & & & & & \\ \hline & 0 & 1 & 2 & 3 & 4 & 5 & 6 & 7 & 8 & & \\ \hline Cash Flow & ($30,000) & $4,000 & $4,500 & $5,000 & $5,500 & $6,000 & $6,500 & $7,000 & $7,500 & & \\ \hline & & & & & & & & & & & \\ \hline & & & & & & & & & & & \\ \hline & IRR = & & & & & & & & & & \\ \hline & & & & & & & & & & & \\ \hline & Does this answer cor & rm the cor & ions fro & the previc & is proble & & & & & & \\ \hline & & & & & & & & & & & \\ \hline & & & & & & & & & & & \\ \hline6 & Using the following & ashflows & same a & in the pre & vious prc & lems), n & at is the & IIRR for t & s project? & & \\ \hline & Calculate it a) manu & ly or 2) u & the MIR & function & where th & reinve & ment r & e=WA & & & \\ \hline & & & & & & & & & & & \\ \hline & & & & Ye & & & & & & & \\ \hline & 0 & 1 & 2 & 3 & 4 & 5 & 6 & 7 & 8 & & \\ \hline Cash Flow & ($30,000) & $4,000 & $4,500 & $5,000 & $5,500 & $6,000 & $6,500 & $7,000 & $7,500 & & \\ \hline & & & & & & & & & & & \\ \hline & Assume WA & & 6% & & & & & & & & \\ \hline & & & & & & & & & & & \\ \hline & & & & & & & & & & & \\ \hline 1) Manual Approach & & & & & & & & & & & \\ \hline Step 1: Calculate T & erminal Value by reinves & g the cas & vs at the & nvestmen & rate. & & & & & & \\ \hline Year & 0 & 1 & 2 & 3 & 4 & 5 & 6 & 7 & 8 & & \\ \hline Cash Flows & ($30,000) & $4,000 & $4,500 & $5,000 & $5,500 & $6,000 & $6,500 & $7,000 & $7,500 & & \\ \hline & & & & & & & & & & & Year 8 \\ \hline & & & & & & & & & & & Year 7 \\ \hline & & & & & & & & & & & Year 6 \\ \hline & & & & & & & & & & & Year 5 \\ \hline & & & & & & & & & & & Year 4 \\ \hline & & & & & & & & & & & Year 3 \\ \hline & & & & & & & & & & & Year 2 \\ \hline & & & & & & & & & & & Year 1 \\ \hline & & & & & & & & & & $0 & Total Terminal Value \\ \hline & Step 2: Discount Term & al (Horizon & ue back t & ime 0 at t & e MIRR sc & that disco & ted value & initial out & & & \\ \hline & (1+MIRR)N(1/N)= & torizon Va & nitial Ou & & & & & & & & \\ \hline & MIRR = & torizon Va & nitial Ou & (1) 1/N1 & & & & & & & \\ \hline & Note: You need to adj & st the form & make th & nitial cash & outflow a & sitive nur & & & & & \\ \hline & MIRR = & & Manual & oproach & & & & & & & \\ \hline & & & & & & & & & & & \\ \hline & 2) MIRR Function & & & & & & & & & & \\ \hline & & & & & & & & & & & \\ \hline & MIRR = & & MIRR F & ction & & & & & & & \\ \hline \end{tabular} \begin{tabular}{|c|c|c|c|c|c|c|c|c|c|} \hline 7 & Given the same cas & flows and & ACC as in & the previo & us probl & ms, what & s the Pr & itability I & lex? \\ \hline & Year 0 & Year 1 & Year 2 & Year 3 & Year 4 & Year 5 & Year 6 & Year 7 & Year 8 \\ \hline Cash Flows & ($30,000) & $4,000 & $4,500 & $5,000 & $5,500 & $6,000 & $6,500 & $7,000 & $7,500 \\ \hline & & & & & & & & & \\ \hline & Assume W & C= & 6% & & & & & & \\ \hline & & & & & & & & & \\ \hline & & & & & & & & & \\ \hline & Answer: & & & & & & & & \\ \hline & Year 0 & Year 1 & Year 2 & Year 3 & Year 4 & Year 5 & Year 6 & Year 7 & Year 8 \\ \hline Cash Flows & ($30,000) & $4,000 & $4,500 & $5,000 & $5,500 & $6,000 & $6,500 & $7,000 & $7,500 \\ \hline Disc Factor & & & & & & & & & \\ \hline Disc Cash Flows & & & & & & & & & \\ \hline & & & & & & & & & \\ \hline & Cash Inflows = & & Or you c & sould take & the NPV & of the Yea & 1 throu & Year 8c & h flows. \\ \hline & Cash Outflows = & & Note tha & it you nee & to take & he absolu & e value & the upfrc & t cash o \\ \hline & Profitability Index & & & & & & & & \\ \hline & & & & & & & & & \\ \hline & & & & & & & & & \\ \hline 8 & & \begin{tabular}{l} ose we ha \\ nual cash \end{tabular} & \begin{tabular}{l} a compan \\ ows and ec \end{tabular} & \begin{tabular}{l} y that is \\ auipment \end{tabular} & \begin{tabular}{l} nsiderir \\ salvaae \end{tabular} & \begin{tabular}{l} underta \\ lues are \end{tabular} & \begin{tabular}{l} ing a pr \\ rovided \end{tabular} & \begin{tabular}{l} ect. \\ low. \end{tabular} & \\ \hline & Year & \begin{tabular}{l} Operating \\ Cash Flow \\ \end{tabular} & \begin{tabular}{c} Salvage \\ Value \end{tabular} & & & & & & \\ \hline & 0 & $5,000 & & & & & & & \\ \hline & 1 & $2,500 & $4,000 & Salvage v & lue if the & quipment & sold at t & end of ye & \\ \hline & 2 & $2,000 & $3,000 & Salvage v & lue if the & quipment & sold at t & end of ye & \\ \hline & 3 & $1,500 & $2,000 & Salvage v & lue if the & quipment & sold at t & end of ye & \\ \hline & 4 & $1,000 & $0 & Salvage v & lue if the & quipment & sold at t & end of ye & \\ \hline & & & & & & & & & \\ \hline & WACC = & 10% & & & & & & & \\ \hline & & & & & & & & & \\ \hline & How many years sho & this compan & keep the pr & oject going & The ans & ver is eithe & 1 year, 2 & jears, 3 ye & s or 4 ye \\ \hline & & & & & & & & & \\ \hline & \begin{tabular}{|l|} \begin{tabular}{l} Note \#1: You don't ne \\ already factored into \end{tabular} \\ Note \#2: You might \end{tabular} & \begin{tabular}{l} to consider \\ ese numbers. \\ Chapter 10 \end{tabular} & \begin{tabular}{l} mything else \\ ool Kit Answ \end{tabular} & other than & he inform & tion provid & d above. & or exampl & taxes are \\ \hline & Note $2 : You might ft & & & & & & & & \\ \hline & Optimal \# of Years = & & & - & & & & & \\ \hline & Upurmal if of rears = & & & & & & & & \\ \hline & & & & & & & & & \\ \hline & Ans. & & & & & & & & \\ \hline & Optimal \# of Years = & & & & & & & & \\ \hline & & & & & & & & & \\ \hline & Step 1: Calculate the & V of the one & tina cash flo & WS and the & salvage y & lues for ea & hyeac. & & \\ \hline & & Year & \begin{tabular}{l} Operating \\ Cash \\ Flows in \\ each year \end{tabular} & \begin{tabular}{c} Salvage \\ Value in \\ each \\ year if \end{tabular} & & & & & \\ \hline & & 0 & & & & & & & \\ \hline & & 1 & & & & & & & \\ \hline & & 2 & & & & & & & \\ \hline & & 3 & & & & & & & \\ \hline & & 4 & & & & & & & \\ \hline & & & & & & & & & \\ \hline & Step 2: Add the PV & the operating & cash flows + & salvace y & ve to det & mine in w & ch vear is & he NPV m & imized. \\ \hline & & & NPV & \begin{tabular}{l} Initial \\ Cost \end{tabular} & + & \begin{tabular}{l} PV of \\ Operatin \\ g Cash \\ Flows \end{tabular} & + & \begin{tabular}{c} PV of \\ Salvage \\ Value \end{tabular} & \\ \hline & Operate for 1 Year: & NPV1: & & & & & & & \\ \hline & Operate for 2 Years: & NPV2: & & & & & & & \\ \hline & Operate for 3 Years: & NPV3: & & & & & & & \\ \hline & Operate for 4 Years: & NPV4: & & & & & & & \\ \hline \end{tabular}