PS# 7: Capital Budgeting FM: Chapter 10 # 8,9,12,13 & 21

(108) NPVs, IRRs, and MIRRs for Independent Projects Edelman engineering is considering two pieces of equipment, a truck, and an overhead pulley system, in this year's capital budget. The projects are independent. The cash outlay for the truck is $17,000 and that for the pulley system is $22,430. The firm's cost of capital is 14%. After-tax cash flows, including depreciation, are as follows: Calculate the IRR, the NPV, and the MIRR for each project, and indicate the correct accept-reject decision for each. (109) NPVs and IRRs for Mutually Exclusive Projects Davis Industries must choose between a gas-powered and an electric-powered forklift truck for moving materials in its factory. Because both forklifts perform the same function, the firm will choose only one. (They are mutually exclusive investments.) The electric-powered truch will cost more, but it will be less expensive to operate; it will cost $22,000, whereas the gas powered truck will cost $17,500. The cost of capital that applies to both investments is 12% The life for both types of truck is estimated to be 6 years, during which time the net cash flows for the electric-powered truck will be $6,290 per year and those for the gas-powered truck wil be $5,000 per year. Annual net cash flows include depreciation expenses. Calculate the NPV and IRR for each type of truck and decide which to recommend. NPV and IRR Analysis After discovering a new gold vein in the Colorado mountains, CTC Mining Corporation must decide whether to go ahead and develop the deposit. The most cost-effective method of mining gold is sulfuric acid extraction, a process that could result in environmental damage. Before proceeding with the extraction, CTC must spend $900,000 for new mining equipment and pay $165,000 for its installation. The gold mined will net the firm an estimated $350,000 each year for the 5-year life of the vein. CTC's cost of capital is 14%. For the purposes of this problem, assume that the cash inflows occur at the end of the year. a. What is the project's NPV and IRR? b. Should this project be undertaken if environmental impacts were not a consideration? c. How should environmental effects be considered when evaluating this, or any other, project? How might these concepts affect the decision in Part b? (1013) NPV and IRR Analysis Cummings Products is considering two mutually exclusive investments whose expected net cash flows are as follows: a. Construct NPV profiles for Projects A and B. b. What is each project's IRR? c. If each project's cost of capital were 10%, which project, if either, should be selected: If the cost of capital were 17%, what would be the proper choice? d. What is each project's MIRR at the cost of capital of 10% ? At 17\%? (Hint: Consider Period 7 as the end of Project B's life.) e. What is the crossover rate, and what is its significance? (1021) Payback, NPV, and MIRR Your division is considering two investment projects, each of which requires an up-front expenditure of $25 million. You estimate that the cost of capital is 10% and that the investments will produce the following after-tax cash flows (in millions of dollars): a. What is the regular payback period for each of the projects? b. What is the discounted payback period for each of the projects? c. If the two projects are independent and the cost of capital is 10%, which project or projects should the firm undertake? d. If the two projects are mutually exclusive and the cost of capital is 5%, which project should the firm undertake? e. If the two projects are mutually exclusive and the cost of capital is 15%, which projec should the firm undertake? f. What is the crossover rate? g. If the cost of capital is 10%, what is the modified IRR (MIRR) of each project