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Calculating Payback, NPV, and MIRR parameters

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Your division is considering two investment projects, each of which requires an up-front expenditure of $28 million. You estimate that the cost of capital is 8% and that the investments will produce the following after-tax cash flows (in millions of dollars):

Year Project A Project B
1 5 20
2 10 10
3 15 8
4 20 6

a. What is the regular payback period for each of the projects?

b. What is the discounted payback period for each of the projects?

c. If the two projects are independent and the cost of capital is 8%, which project or projects should the firm undertake?

d. If the two projects are mutually exclusive and the cost of capital is 5%, which project should the firm undertake?

e. If the two projects are mutually exclusive and the cost of capital is 15%, which project should the firm undertake?

f. What is the crossover rate?

g. If the cost of capital is 8%, what is the modified IRR (MIRR) of each project?

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Solution depicts the steps to estimate payback period, discounted payback period, NPV, and MIRR parameters for the given investment proposals.

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Capital budgeting

The Seattle Corporation has been presented with an investment opportunity which will yield end-of-year cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10. This investment will cost the firm $150,000 today, and the firm's cost of capital is 8 percent.

a. What is the Payback Period, Discounted Payback Period, NPV, IRR, and MIRR for this investment?

b. Should the project be accepted or rejected?

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