Q1
Pound Indus tries is attempting to select the best of three mutually exclusive projects. The ini tial investment and
following table.
Project A Project B Project C
Initial Investment $ 60,000 $ 100,000 $ 110,000
Year (t) Operating cash inflows
1 $ 20,000 $ 31,500 $ 32,500
2 $ 20,000 $ 31,500 $ 32,500
3 $ 20,000 $ 31,500 $ 32,500
4 $ 20,000 $ 31,500 $ 32,500
5 $ 20,000 $ 31,500 $ 32,500
2 a. Calculate the payback period for each project and discounted payback period. ( 2 marks)
1 b. Calculate the net present value (NPV) of each project, assuming that the firm has a cost of capital equal to 13%. (
1 c. Calculate the internal rate of return (IRR) and MIRR for each project. (1 mark)
1 d. Summarize the preferences dictated by each measure, and indicate which project you would recommend. Explai
Solution
project A
YEAR NCF Accunmulated NCF Discounted NCF
0 -60000 -60000 -60000
1 $ 20,000 $ -40,000 $ 17,699.12
2 $ 20,000 $ -20,000 $ 15,662.93
3 $ 20,000 $ - $ 13,861.00
4 $ 20,000 $ 20,000 $ 12,266.37
5 $ 20,000 $ 40,000 $ 10,855.20
A) PAYBACK PERIOD 3 Discounted PB
B) NPV $10,344.63
C) IRR 19.86%
MIRR 16.65%
D) payback period On the basis of payback period aloone I would accept project A
NPV On the basis of NPV alone I would accept project B as it gives the highest net present value
IRR on the basis of IRR project A shall be accepted as it has the highest IRR of the rest
MIRR Similarly project A has the Highest MIRR
If a company prefers payback period, irr and mirr they would accept project A
OVERALL PROJECT B SHOULD BE ACCEPTED AS IT HAS THE HIGHEST NPV
jects. The ini tial investment and after-tax cash inflows associated with these projects are shown in the
following table.
COST OF CAPITAL
2 marks)
a cost of capital equal to 13%. (1 mark)
t you would recommend. Explain why. (1 mark)
PROJECT B
Accumulated DNCF NCF Accunmulated NCF
-60000 -100000 -100000
$ (42,300.88) $ 31,500 $ -68,500
$ (26,637.95) $ 31,500 $ -37,000
$ (12,776.95) $ 31,500 $ -5,500
$ (510.57) $ 31,500 $ 26,000
$ 10,344.63 $ 31,500 $ 57,500
4.047034928 PAYBACK 3.174603175
NPV $10,792.78
IRR 17.34%
MIRR 15.34%
ld accept project A
ves the highest net present value
hest IRR of the rest
ccept project A
13%
PROJECT B PROJECT C
Discounted NCF Accumulated DNCF NCF Accunmulated NCF
-100000 -100000 $ -110,000 $ -110,000
$ 27,876.11 $ (72,123.89) $ 32,500 $ -77,500
$ 24,669.12 $ (47,454.77) $ 32,500 $ -45,000
$ 21,831.08 $ (25,623.69) $ 32,500 $ -12,500
$ 19,319.54 $ (6,304.15) $ 32,500 $ 20,000
$ 17,096.94 $ 10,792.78 $ 32,500 $ 52,500
Discounted PB 4.368729959 Payback 3.384615385
NPV $ 4,310.02
IRR 14.59%
MIRR 14%
PROJECT C
Discounted NCF Accumulated DNCF
$ -110,000 $ -110,000
$ 28,761.06 $ (81,238.94)
$ 25,452.27 $ (55,786.67)
$ 22,524.13 $ (33,262.54)
$ 19,932.86 $ (13,329.68)
$ 17,639.70 $ 4,310.02
Discounted PB 4.755663843
Q2 Calculate MIRR of the project (1 mark)
Project
1 Year year-end cash flows
0 $ -150,000 Finance rate 10%
1 $ -30,000 Reinvestment rate 8%
2 $ 40,000
3 $ 70,000
4 $ -20,000
5 $ 90,000
Solution
3.06%
Q3
Jordan Enterprises is considering a capital expenditure that requires an initial investment of $42,000 and returns after-tax cash inflows of $7,000 per year f
years. b. Should the company accept the project? Why or why not?
1 a. Determine the payback period for this project. (1 mark)
1 b. Should the company accept the project? Why or why not? (1 mark)
Solution
0
1
2
3
4
5
6
7
8
9
10
a)
b)
Jordan Enterprises is considering a capital expenditure that requires an initial investment of $42,000 and returns after-tax cash inflows of $7,000 per year for 10 years. The firm
years. b. Should the company accept the project? Why or why not?
a. Determine the payback period for this project. (1 mark)
b. Should the company accept the project? Why or why not? (1 mark)
-42000
7000
7000
7000
7000
7000
7000
7000
7000
7000
7000
payback
we should accept the project as the payback period of this project is less than maximum acceptable period of the company
10 years. The firm has a maximum acceptable payback period of 8
$ -42,000
$ -35,000
$ -28,000
$ -21,000
$ -14,000
$ -7,000
$ -
$ 7,000
$ 14,000
$ 21,000
$ 28,000
6
accept
