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Doleh Sufian ch10 p23 Build A Model PDF Free

This document summarizes the analysis of two investment projects, Projects A and B, being considered by Gardial Fisheries. Project A has a higher net present value of $226.96 and internal rate of return of 18.64% compared to Project B's NPV of $206.17 and IRR of 23.92% at a 12% cost of capital. However, at an 18% cost of capital, Project B has a higher NPV of $89.54. The crossover rate, where the two projects have equal NPV, is 13.14%.

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103 views

Doleh Sufian ch10 p23 Build A Model PDF Free

This document summarizes the analysis of two investment projects, Projects A and B, being considered by Gardial Fisheries. Project A has a higher net present value of $226.96 and internal rate of return of 18.64% compared to Project B's NPV of $206.17 and IRR of 23.92% at a 12% cost of capital. However, at an 18% cost of capital, Project B has a higher NPV of $89.54. The crossover rate, where the two projects have equal NPV, is 13.14%.

Uploaded by

Mathy Mtenje
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© © All Rights Reserved
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Download as PDF, TXT or read online on Scribd
You are on page 1/ 6

Sufian Doleh FIN 501 7/19/2013 0:00

CSU ID 2356325
Chapter 10. Solution for Chapter 10 P23 Build a Model

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
WACC = 12% WACC = 18% chapter's Tool Kit. Note that the range does not
include the costs, which are added separately.
NPV A = $226.96 NPV A = $18.24

NPV B = $206.17 NPV B = $89.54

At cost of capital of 12 percent, Project A should be selected. But if the cost of capital rises to 18 percent, then
Project B should be accepted instead.

b. Construct NPV profiles for Projects A and B.

Before we can graph the NPV profiles for these projects, we must create a data table of project NPVs relative to differing costs
of capital.
NPV
Project A Project B NPV Profiles
$1,000
$226.96 $206.17
0% $951.00 $565.00
2% $790.31 $489.27 $800
4% $648.61 $421.01
6% $523.41 $359.29 Project A
$600
8% $412.58 $303.35
10% $314.28 $252.50
12% $226.96 $206.17 $400
14% $149.27 $163.85
16% $80.03 $125.10
$200 Project B
18% $18.24 $89.54
20% ($36.98) $56.85
$0
22% ($86.39) $26.71 $0
24% ($130.65) ($1.11) 0 0.05 0.1 0.15 0.2 0.25
26% ($170.34) ($26.85)
-$200
28% ($205.97) ($50.72)
30% ($237.98) ($72.88) Cost of Capital
-$400
c. What is each project's IRR?

We find the internal rate of return with Excel's IRR function:

IRR A = 18.64% Note in the graph above that the X-axis intercepts are equal to the two projects' IRRs.
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 The crossover rate represents the cost of capital at which the two projects
5 $410 have the same net present value. In this scenario, that common net present
6 $736 value, at a cost of capital of 13.14% is: $182
7 ($200)

e. What is each project's MIRR at a cost of capital of 12%? At r = 18%? (Hint: Consider Period 7 as the end of
Project B's life.)

@ 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
Cash flow (375) (300) (200) (100) 600 $600 $926
Cumulative cash flow (375) (675) (875) (975) (375) 225 1,151
Payback 4.625

Project B
Time period 0 1 2 3 4 5 6
Cash flow (575) 190 190 190 190 $190 $190
Cumulative cash flow (575) (385) (195) (5) 185 375 565
Payback 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
Cash flow (375) (300) (200) (100) 600 $600 $926
Disc. cash flow (375) (268) (159) (71) 381 340 469
Disc. cum. cash flow (375) (643) (802) (873) (492) (152) 317
Discounted Payback 5.40

Project B
Time period 0 1 2 3 4 5 6
Cash flow (575) 190 190 190 190 $190 $190
Disc. cash flow (575) 170 151 135 121 108 96
Disc. cum. cash flow (575) (405) (254) (119) 2 110 206
Discounted Payback 3.98

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
ws are as follows:

, what

explained in this
the range does not
dded separately.

18 percent, then

ative to differing costs


0.3

st of Capital

ojects' IRRs.

e two projects
mon net present

the end of

7
($200)
951

7
$0
565
7
($200)
(90)
227

7
$0
0
206

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