FINA 450*1 Net Present Value & Other Methods Comprehensive Problem Microm Inc. has two mutually exclusive projects under consideration. Expected net cash flows Time Project A Project B 0 ($475) ($675) 1 ($300) $190 2 ($200) $190 3 ($100) $190 4 $600 $190 5 $600 $190 6 $926 $190 7 $200 $0 a. If you were told that each project's cost of capital was 10 percent, which project should be selected? If the cost of capital was 16 percent, what would be the proper choice? @ a 10% cost of capital @ a 16% cost of capital WACC = 10% WACC = 16% NPV A = NPV A = NPV B = NPV B = Which project should be selected if the cost of capital is 10% and which project, if the cost of capital is 16%? b. Construct NPV profiles for Projects A and B. Before we can graph the NPV profiles for these projects, we must create a data table of project NPV relative to differing costs of capital. Project A Project B $0.00 $0.00 0% $0.00 $0.00 5% $0.00 $0.00 10% $0.00 $0.00 12% $0.00 $0.00 18% $0.00 $0.00 20% $0.00 $0.00 22% $0.00 $0.00 25% $0.00 $0.00 30% $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 c. What is each project's IRR? We find the internal rate of return with Excel's IRR function: IRR A = IRR B = d. What is each project's MIRR at a cost of capital of 10 percent? At r = 16%? (Hint: Consider Period 7 to be the end of Project B's life.) @ a 10% cost of capital @ a 16% cost of capital MIRR A = MIRR A = MIRR B = MIRR B = e. What is the crossover rate, and what is its significance? Cash flow Time differential 0 1 2 Crossover rate = 3 4 The crossover rate represents the cost of capital at which the two projects have the same net present value. In this scenario, that common net present 5 6 value, at the crossover rate is 7 f. What is the regular payback period for these two projects? Project A Time period: 0 1 2 3 4 5 6 7 Cash flow: (475) (300) (200) (100) 600 $600 $926 $200 Cumulative cash flow: % of year required for payback: Max Row 93=Payback: Project B Time period: 0 1 2 3 4 5 6 7 Cash flow: (675) 190 190 190 190 $190 $190 $0 Cumulative cash flow: % of year required for payback: Payback: h. What is the profitability index for each project if the cost of capital is 10 percent? PV of future cash flows for A: PI of A: PV of future cash flows for B: PI of B: