Question 2

Your division is considering two projects. Its WACC is 10%, and the projects’ after-tax cash flows (in millions of dollars) would be as follows:

a) Calculate the projects’ NPVs, IRRs, MIRRs, regular paybacks, and discounted paybacks. If the two projects are independent, which project(s) should be chosen?

b) If the two projects are mutually exclusive and the WACC is 10%, which project(s) should be chosen?

c) Plot NPV profiles for the two projects. Identify the projects’ IRRs on the graph.

d) 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

e) The crossover rate is 13.5252%. Explain what this rate is and how it affects the choice between mutually exclusive projects.

f) Define the MIRR. What’s 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.