Gardial Fisheries is considering two mutually exclusive investments. The projects' expected net cash flows are as follows: Expected Net Cash Flows Project A Project B Time 0 ($375) ($575) 1 ($300) $190 2 ($200) $190 3 ($100) $190 4 $600 $190 5 $600 $190 6 $926 $190 7 ($200) $0 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 proper choice? @ 12% cost of capital @ 18% cost of capital WACC 12% WACC = = Use Excel's NPV function as explained in 18% this chapter's Tool Kit. Note that the range does not include the costs, which are added separately. NPV A = NPV A = NPV B NPV B= 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 NPVs relative to differing costs of capital. Project A Project B 0% $951.00 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% 24% 26% 28% 30% c. What is each project's IRR? We find the internal rate of return with Excel's IRR function: Note in the graph above that the X-axis intercepts are equal to the two projects' IRR A= IRR B = d. What is the crossover rate, and what is its significance? Cash flow differential Time 0 1 2 Crossover rate = 3 4 5 The crossover rate represents the cost of capital at which the two projects value, at a cost of capital of 13.14% is: 6 7 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. @ 12% cost of capital 18% cost of capital MIRR A = MIRR B = f. What is the regular payback period for these two projects? Project A 0 1 3 5 6 Time period Cash flow (375) $600 $926 Cumulative cash flow Intermediate calculation for payback Payback using intermediate calculations Time period 5 6 Cash flow Cumulative cash flow Intermediate calculation for payback Payback using intermediate calculations Project B 0 1 (300) MIRR A= MIRR = B 2 2 (200) (100) 3 4 600 4 7 ($200) 7 g. At a cost of capital of 12%, what is the discounted payback period for these two projects? WACC = 12% Project A 1 2 3 4 Time period 0 Cash flow 3 Disc. cash flow Disc. cum. cash flow Intermediate calculation for payback Payback using intermediate calculations Time period 1 2 Cash flow Disc. cash flow Disc. cum. cash flow Intermediate calculation for payback Payback using intermediate calculations h. What is the profitability index for each project if the cost of capital is 12%? PV of future cash flows for A: Pl of A: PV of future cash flows for B: Pl of B: Project B 0 4 5 5 6 6 7 7
