You recently went to work for Allied Components Company, a supplier of auto repair parts used in the after-market with products from Daimler AG, Ford, Toyota, and other automakers. Your boss, the chief financial officer (CFO), has just handed you the estimated cash flows for two proposed projects. Project 1, involves adding a new item to the firms ignition system line; it would take some time to build up the market for this product, so the cash inflows would increase over time. Project 5 involves an add-on to an existing line, and its cash flows would decrease over time. Both projects have 3-year lives because Allied is planning to introduce entirely new models after 3 years. Here are the projects after-tax cash flows (in thousands of dollars);

0 1 2 3

Project 1 -100 $10 $60 $80

Project 5 -100 $70 $50 $20

Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. The CFO also made subjective risk assessments of each project, and he concluded that both projects have risk characteristics that are similar to the firms average project. Allieds WACC is 10%. You must determine whether one or both of the project should be accepted

. a. Draw NPV profiles for Projects L and S. At what discount rate do the profiles cross?

b.. Look at your NPV profile graph without referring to the actual NPVs and IRRs. Which project(s) should be accepted if they are independent? Mutually exclusive? Explain. Are your answers correct at any WACC less than 23.6%?

c.. What is the underlying cause of ranking conflicts between NPV and IRR

d. What is the reinvestment rate assumption, and how does it affect the NPV versus IRR conflict

e. Which method is the best? Why?

f. Define the term modified IRR (MIRR). Find the MIRRs for Projects L and S.

g. What are the MRRs advantages and disadvantages as compared to the NPV?

h. What is the payback period? Find the paybacks for Projects L and S.

i. What is the rationale for the payback method? According to the payback criterion, which project(s) should be accepted if te firms maximum acceptable payback is 2 years, if Project L and S are independent? If Project L and S are mutually exclusive?