Case Study: Long-term investment decisions by David Ortiz Motors You just graduated from SZABIST Islamabad and David Ortiz Motors hired you as a chief financial analyst to assist them in making optimal financing and investment decisions. The information related to financing potential capital projects is given below. You will analyze the information entirely and will suggest them on long term decisions of the company. They have prepared a list of questions given at the end for which you will answer based on your calculations. The director of capital budgeting has asked you to analyze two proposed capital investments, Projects X and Y. Each project has a cost of $20,000, and the cost of capital for each is 10%. The projects expected net cash flows are as follows: Expected Net Cash Flows Years Project X Project Y 0 -20000 -20000 1 8000 4000 2 6000 3500 3 4000 4000 4 1000 3500 a) Calculate each projects payback period, net present value (NPV), internal rate of return (IRR),

modified internal rate of return (MIRR), and profitability index (PI). b) Which project or projects should be accepted if they are independent? c) Which project should be accepted if they are mutually exclusive? d) How might a change in the cost of capital produce a conflict between the NPV and IRR rankings of these two projects? Would this conflict exist if r were 5%? (Hint: Plot the NPV profiles.) e) Why does the conflict exist?