I’m working on a business question and need guidance to help me learn.
You are a financial analyst for the Waffle Company. The director of capital budgeting has asked you to analyze two proposed capital investments, Projects A and B. Each project has a cost of $50,000, and the cost of capital for each is 10%.
The projects’ expected net cash flows are as follows:
|
Expected Net Cash Flows |
||
|
Year |
Project A |
Project B |
|
0 |
($50,000) |
($50,000) |
|
1 |
25,000 |
15,000 |
|
2 |
20,000 |
15,000 |
|
3 |
10,000 |
15,000 |
|
4 |
5,000 |
15,000 |
|
5 |
5,000 |
15,000 |
- Calculate each project’s payback period, net present value (NPV), internal rate of return (IRR), modified internal rate of return (MIRR), and profitability index (PI).
- Which project will you select if your decision was based solely on the project’s payback period?
- Which project or projects should be accepted if they are independent?
- Which project should be accepted if they are mutually exclusive?
- d. How might a change in the cost of capital produce a conflict between the NPV and IRR rankings of these two projects? Would this conflict exist if r were 6%? (Hint: Plot the NPV profiles.)
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