- Capital Structure and Firm Value
Calculating factors impacting cash flow
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The director of capital budgeting for a firm has identified two mutually exclusive projects, A and B, with the following expected net cash flows:
Expected Net Cash Flows
Year Project A Project B
0 ($120) ($120)
1 80 20
2 60 70
3 30 90
Both of the projects have a cost of capital of 14 percent.
(i) What is Project A's and Project B's net present value (NPV)?
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(ii) What is the profitability index (PI) for Project B?
(iii) What is the modified internal rate of return for Project A?
The solution provides an attached Excel file attached that shows how to calculate the NPV, PI and modified internal rate of return for two mutually exclusive projects.