Gardial Fisheries is considering two mutually exclusive investments. The projects' expected net cash flows are as follows:

Expected Net Cash Flows

Time Project A Project B

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

Use Excel's NPV function as explained in this chapter's Tool Kit. Note that the range does not include the costs, which are added separately.

WACC = 12% WACC = 18%

NPV A = NPV A =

NPV B = NPV B =

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, and Project B should be accepted.

c. What is each project's IRR?

We find the internal rate of return with Excel's IRR function:

IRR A = Note in the graph above that the X-axis intercepts are equal to the two projects' IRRs.

IRR B =

"e. What is each project's MIRR at a cost of capital of 12%? At r = 18%? (Hint: Consider Period 7 as the end of

Project B's life.)"

@ 12% cost of capital @ 18% cost of capital

MIRR A = MIRR A =

MIRR B = MIRR B =

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 (375) (300) (200) (100) 600 $600 $926 ($200)

Cumulative cash flow

Payback

Project B

Time period 0 1 2 3 4 5 6 7

Cash flow (575) 190 190 190 190 $190 $190 $0

Cumulative cash flow

Payback

g. At a cost of capital of 12%, what is the discounted payback period for these two projects?

WACC = 12%

Project A

Time period 0 1 2 3 4 5 6 7

Cash flow (375) (300) (200) (100) 600 $600 $926 ($200)

Disc. cash flow

Disc. cum. cash flow

Discounted Payback

Project B

Time period 0 1 2 3 4 5 6 7

Cash flow (575) 190 190 190 190 $190 $190 $0

Disc. cash flow

Disc. cum. cash flow

Discounted Payback

h. What is the profitability index for each project if the cost of capital is 12%?

PV of future cash flows for A:

PI of A:

PV of future cash flows for B:

PI of B: