Student Chapter: 12 Problem: 23 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 = $226.96 NPV A = $18.24 NPV B = $206.17 NPV B = $89.54 b. Construct NPV profiles for Projects A and B. Draw here: Project A Project B $226.96 $206.17 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% 24% 26% 28% 30% c. What is each project's IRR? IRR A = 18.64% IRR B = 23.92% d. What is the crossover rate, and what is its significance? Cash flow Time differential 0 $200 1 ($490) 2 ($390) Crossover rate = 13.14% 3 ($290) 4 $410 5 $410 6 $736 7 ($200) 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 = 15.43% MIRR A = 18.34% MIRR B = 17.01% MIRR B = 20.47% 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 -$375 -$675 -$875 -$975 -$375 $225 $1,151 $951 Intermediate calculation for payback Payback using intermediate calculations 4.625 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 -$575 -$385 -$195 -$5 $185 $375 $565 $565 Intermediate calculation for payback Payback using intermediate calculations 3.026 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 -$375 -$268 -$159 -$71 $381 $340 $469 -$90 Disc. cum. cash flow -$375 -$643 -$802 -$873 -$492 -$152 $317 $227 Intermediate calculation for payback Payback using intermediate calculations 5.323 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 -$575 $170 $151 $135 $121 $108 $96 $0 Disc. cum. cash flow -$575 -$405 -$254 -$119 $2 $110 $206 $206 Intermediate calculation for payback Payback using intermediate calculations 3.983 h. What is the profitability index for each project if the cost of capital is 12%? PV of future cash flows for A: $601.96 PI of A: 1.61 PV of future cash flows for B: $781.17 PI of B: 1.36 i. Discuss the advantages and disadvantages of each method you used above (parts a-h) j. According to the calculations, which method is the best to make a decision? Which project should you choose?