Question
Question 2: Your organization is considering two projects. Its WACC is 10%, and the projects after-tax cash flows (in millions of dollars) would be as
Question 2:
Your organization is considering two projects. Its WACC is 10%, and the projects after-tax cash flows (in millions of dollars) would be as follows:
flows (in millions of dollars) would be as follows:
Address the following:
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Calculate the projects NPVs, IRRs, MIRRs, regular paybacks, and discounted paybacks.
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If the organization decides to view both projects as independent, which project(s) should be chosen? Why?
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If the two projects are mutually exclusive, which project(s) should be chosen? Why?
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If the two projects are mutually exclusive and the WACC is 10%, which project(s) should be chosen?
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If the WACC was 5%, would this change your recommendation if the projects were mutually exclusive? If the WACC was 15%, would this change your recommendation? Explain your answers.
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Calculate the crossover rate. Explain what this rate is and how it affects the choice.
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Is it possible for conflicts to exist between the NPV and the IRR when independent projects are being evaluated? Explain your answer.
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Now, look at the regular and discounted paybacks. Which project looks better when judged by the paybacks?
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What is the difference between the IRR and the MIRR, and which generally gives a better idea of the rate of return on the investment in a project? Explain.
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