(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

 

added separately.

 

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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