Answer to student's question about: Capital Budgeting
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A firm with a 14 percent WACC is evaluating two projects for this year's capital budget. After-tax cash flows, including depreciation, are as follows:
0 1 2 3 4 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, IRR, MIRR, payback, and discounted payback for each project.
b. Assuming the projects are independent, which one or ones would you recommend?
c. If the projects are mutually exclusive, which would you recommend?
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Solution Summary
The solution explains the calculation of NPV, IRR, MIRR, payback, discounted payback and project acceptance/rejection.
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0 1 2 3 4 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, IRR, MIRR, payback, and discounted payback for each project.
Payback is the time taken to recover the initial investment. Payback period for A is 6,000/2,000=3 years
Payback period for B is 18,000/5,600=3.21 years
In discounted payback we use the discounted ...
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