Problem 1: Capital Budgeting Criteria

XYZ Inc. is considering two projects. Its WACC is 12 percent, and the projects' after-tax cash flows (in millions of dollars) would be as follows:

0 1 2 3 4

Project A ($30) $5 $10 $15 $20

Project B ($30) $20 $10 $8 $6

1. Calculate the projects' NPVs, IRRs, MIRRs, regular paybacks, and discounted paybacks.
2. How might conflicts exist between the NPV and the IRR when independent projects are evaluated? Explain your answer.

Problem 2: New Project Analysis

XYZ Inc. needs to install a new manufacturing machine. The base price is $100,000. Installation costs are $10,000. After 3 years the machine will be sold for $75,000. Applicable depreciation rates are 33 percent, 45 percent, 15 percent, and 7 percent. The machine would require a $5,000 increase in net operating working capital (increased inventory less increased accounts payables). Revenue would not be affected. Pretax labor costs would decline by $40,000 per year. The marginal tax rate is 40 percent, and the WACC is 10 percent. Also, the firm spent $7,000 in feasibility tests.

1. $7,000 was spent last year. How should this be handled?
2. For capital budgeting purposes, what is the initial investment outlay for the machine? That is, what is the Year 0 project cash flow?