A1 A f Build a Model A B D E F G H K 1 Build a Model 11/26/18 2 Chapter: 10 3 Problem: 23 4 5 Gardial Fisheries is considering two mutually exclusive investments. The projects' expected net cash flows are as follows: 6 7 8 Expected Net Cash Flows 9 Time Project A Project B 10 0 ($375) ($575) 11 1 ($300) $190 12 2 ($200) $190 13 3 ($100) $190 14 4 $600 $190 15 5 $600 $190 16 6 $926 $190 17 7 ($200) $0 18 19 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 20 proper choice? 21 22 @ 12% cost of capital @ 18% cost of capital 23 Use Excel's NPV function as explained in 24 WACC = 12% WACC = 18% this chapter's Tool Kit. Note that the range 25 does not include the costs, which are added 26 NPV A = NPV A = separately. 27 28 NPV B = NPV B = 29 30 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, 31 and Project B should be accepted. 32 4% 32 33 b. Construct NPV profiles for Projects A and B. 34 35 Before we can graph the NPV profiles for these projects, we must create a data table of project NPVs relative to differing costs of 36 capital. 37 NPV 38 Project A Project B NPV Profiles 39 40 0% 41 2% 42 43 6% Project A 44 8% 45 10% 12% 47 14% 48 16% Project B 49 18% 50 20% 51 22% 52 24% 53 26% 54 28% 55 30% Cost of Capital $ 56 0% 5% 10% 15% 20% 25% 30% 46 0% 5% 10% 15% 20% 25% 30% 57 c. What is each project's IRR? 58 59 We find the internal rate of return with Excel's IRR function: 60 61 IRR A = Note in the graph above that the X-axis intercepts are equal to the two projects' 62 IRR B = 63 64 d. What is the crossover rate, and what is its significance? 65 66 Cash flow 67 Time differential 68 0 69 1 70 2 Crossover rate = 71 3 72 4 The crossover rate represents the cost of 73 5 capital at which the two projects value, at a 74 6 cost of capital of 13.14% is: 75 7 76 77 e. What is each project's MIRR at a cost of capital of 12%? At r = 18%? Hint: note that B is a 6-year project. 78 79 80 @ 12% cost of capital @ 18% cost of capital 81 82 MIRR 83 MIRR B = MIRR B = 84 MIRRA A 04 85 f. What is the regular payback period for these two projects? 86 87 Project A 88 Time period 0 89 Cash flow (375) 90 Cumulative cash flow 2 1 (300) 3 (100) 4 600 5 $600 6 $926 (200) 7 ($200) 91 Intermediate calculation for payback 6 $190 7 $0 92 Payback using intermediate calculations 93 94 Project B 95 Time period 0 1 2 3 4 5 96 Cash flow $575 $190 $190 $190 $190 $190 97 Cumulative cash flow 98 Intermediate calculation for payback 99 Payback using intermediate calculations 100 Payback using PERCENTRANK Ok because cash flows follow normal pattern. 101 102 g. At a cost of capital of 12%, what is the discounted payback period for these two projects? 103 104 WACC = 12% 105 106 Project A 107 Time period 0 1 2 3 4 5 108 Cash flow $375 $300 $200 $100 $600 $ $600 109 Disc. cash flow 110 Disc. cum. cash flow 111 Intermediate calculation for payback 112 Payback using intermediate calculations 113 114 Project B 115 Time period 0 2 3 4 5 116 Cash flow 117 Disc. cash flow 118 Disc. cum. cash flow 119 Intermediate calculation for payback 120 Payback using intermediate calculations 121 Discounted Payback using PERCENTRANK Ok because cash flows follow normal pattern. 6 $926 7 $200 6 7 122 122 123 h. What is the profitability index for each project if the cost of capital is 12%? 124 125 PV of future cash flows for A: 126 PI of A: 127 128 PV of future cash flows for B: 129 PI of B: 130 121