CAPITAL BUDGETING CRITERIA Your division is considering two projects. Its WACC is 10%, and the projects after-tax cash flows ( in millions of dollars) would be as follows;

______ 0__1__2___3__4___

Pro A -$30 $5 $10 $15 $20

Pro B -$30 $20 $10 $8 $6

a) Calculate the projects NPVs, IRRs, MIRRs, regular paybacks and discounted paybacks.

b) If the two projects are independent, which project(s) should be chosen?

c) if the two projects are mutually exclusive and the WACC is 10%, which project(s) should be chosen?

d) Plot NVP profiles for the two projects. Identify the projects IRRs on the graph.

e) If the WACC were 5% would this change your recommendation if the projects were mutually exclusive? If WACC were 15%, would this change your recommendation? Explain your answers.

f) The crossover rate is 13.5252%. Explain what this rate is and how it affects the choice between mutually exclusive projects?

g) Is it possible for conflicts to exist between the NPV and IRR when independent projects are being evaluated? Explain your answer.

h) Now look at the regular and discounted paybacks. Which projects look better when judged by the paybacks?

i) Is the payback was the only method a firm used to accept or reject projects, which paybacks should it use as a cutoff point, that is reject paybacks if their paybacks are not below the chosen cutoff? Is your selected cutoff based on some economic criteria, or is more or less arbitrary? Are the cutoff criteria equally arbitrary when firms use the NPV and / or the IRR as the criteria? Explain.

j) Define the MIRR. Whats the difference between the IRR and the MIRR, and what generally gives a better idea of the rate of return on the investment in a project? Explain.

k) Why do most academics and financial executives regard the NPV as being the signal best criterion and better than the IRR? Why do companies still calculate IRRs?