A firm with a 14% WACC is evaluating two projects for this year’s capital budget. After-tax cash flows, including depreciation, are as follows: Project A, IRR = 19.86% and Project B, IRR = 16.80% Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Project A -$6,000 $2,000 $2,000 $2,000 $2,000 $2,000 Project B -$18,000 $5,600 $5,600 $5,600 $5,600 $5,600 a) Calculate NPV, payback, and discounted payback for each project. b) Assuming the projects are independent, which one(s) would you recommend? c) If the projects are mutually exclusive, which would you recommend? d) Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRR?
A firm with a 14% WACC is evaluating two projects for this year’s capital budget. After-tax cash flows, including depreciation, are as follows: Project A, IRR = 19.86% and Project B, IRR = 16.80% Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Project A -$6,000 $2,000 $2,000 $2,000 $2,000 $2,000 Project B -$18,000 $5,600 $5,600 $5,600 $5,600 $5,600 a) Calculate NPV, payback, and discounted payback for each project. b) Assuming the projects are independent, which one(s) would you recommend? c) If the projects are mutually exclusive, which would you recommend? d) Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRR?
Chapter11: Capital Budgeting Decisions
Section: Chapter Questions
Problem 16EA: Project B cost $5,000 and will generate after-tax net cash inflows of $500 in year one, $1,200 in...
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A firm with a 14% WACC is evaluating two projects for this year’s capital budget. After-tax cash flows, including depreciation, are as follows: Project A,
|
|
Year 0 |
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
|
Project A |
-$6,000 |
$2,000 |
$2,000 |
$2,000 |
$2,000 |
$2,000 |
|
Project B |
-$18,000 |
$5,600 |
$5,600 |
$5,600 |
$5,600 |
$5,600 |
- a) Calculate NPV, payback, and discounted payback for each project.
- b) Assuming the projects are independent, which one(s) would you recommend?
- c) If the projects are mutually exclusive, which would you recommend?
- d) Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRR?
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