  (Solution) 12/7/2012 Chapter: Problem: 10 23 Gardial Fisheries Is Considering Two Mutually Exclusive Investments. The Projects' Expected Net Cash Flows Are As | Snapessays.com

(Solution) 12/7/2012 Chapter: Problem: 10 23 Gardial Fisheries is considering two mutually exclusive investments. The projects' expected net cash flows are as

Use the template provided and complete problem 10-23.Please show all work in excelStart with the partial model in the file Ch10 P23 Build a Model.xls on the textbook Web site. Gardial Fisheries is considering two mutually exclusive investments.Thanks12/7/2012

Chapter:

10

Problem:

23

Expected Net Cash Flows

Time

Project A

Project B

(\$375)

(\$575)

1

(\$300)

\$190

2

(\$200)

\$190

3

(\$100)

\$190

4

\$600

\$190

5

\$600

\$190

6

\$926

\$190

7

(\$200)

\$0

@ 12% cost of capital

@ 18% cost of capital

WACC

=

12%

WACC

=

18%

b.

Construct NPV profiles for Projects A and B.

Project A

Project B

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

22%

24%

26%

28%

30%

c.

What is each project's IRR?

We find the internal rate of return with Excel's

IRR function:

d.

What is the crossover rate, and what is its significance?

Cash flow

Time

differential

1

2

Crossover rate

=

3

4

5

6

7

e.

What is each project's MIRR at a cost of capital of 12%?

At r = 18%? Hint: note that B is a 6-year project.

@ 12% cost of capital

@ 18% cost of capital

f.

What is the regular payback period for these two projects?

Project A

Time period

1

2

3

4

5

6

7

Cash flow

(375)

(300)

(200)

(100)

600

\$600

\$926

(\$200)

Cumulative cash flow

Payback

Project B

Gardial Fisheries is considering two mutually exclusive

investments.

The projects' expected net cash

flows are as follows:

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?

Use Excel's NPV function as explained in

this chapter's Tool Kit.

Note that the range

does not include the costs, which are

NPV

A

=

NPV

A

=

NPV

B

=

NPV

B

=

At a cost of capital of 12%, Project A should be selected.

However, if the cost of capital rises to 18%,

then the choice is reversed, and Project B should be accepted.

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.

IRR

A

=

projects' IRRs.

IRR

B

=

capital at which the two projects value, at

a cost of capital of 13.14% is:

have the same net present value.

In this

scenario, that common net present

MIRR

A

=

MIRR

A

=

MIRR

B

=

MIRR

B

=

Project A

Project B

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