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Projects After-Tax Cash Flows

Your division is considering two projects. Its WACC is 10 percent, and the projects after-tax cash flows (in million of dollars) would be:

TIME 1 2 3 4 5
-------------------------------------------------
Project A: -$30 5 10 15 20
Project B: -$30 20 10 8 6

a. Calculate the projects' NPVs, IRRs, payback periods.

b. If the two projects are independent, which project(s) should be chosen?

c. If the two projects are mutually exclusive and the WACC is 10 percent, which projects should be chosen?

d. Plot NPV profiles for the two projects. Identify the projects'IRRs on the graph.

e. If the WACC were 5 percent, would this change your recommendation if the projects were mutually exclusive? If the WACC were 15 percent, would this change your recommendation? Explain your answers.

f. The 'crossover rate' is 13.5252 percent. Explain in words what this rate is and how it affects the choice between mutually exclusive projects.

g. If it possible for conflicts to exist between the NPV and the IRR when independent projects are being evaluated? Explain your answer.

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Your division is considering two projects. Its WACC is 10 percent, and the projects after-tax cash flows (in million of dollars) would be:
Time 1 2 3 4 5
Project A -30 5 10 15 20
Project B -30 20 10 8 6

a. Calculate the projects NPVs, IRRs, payback periods.
Cash flows Discounted cash flow
Year Project A Project B Discount rate Discount factor Project A Project B
0 -$30.00 -$30.00 10% 1.00 =(1+10%)^Year -$30.00 -$30.00
1 $5.00 $20.00 10% 1.10 $4.55 =5/1.10 $18.18 =20/1.10
2 $10.00 $10.00 10% 1.21 $8.26 $8.26
3 $15.00 $8.00 10% 1.33 $11.27 $6.01
4 $20.00 $6.00 10% 1.46 $13.66 $4.10
NPV $7.74 =total $6.55

Project A
Discount rate Discount factor Discounted cash flow
Year Cash flows :+NPV :-NPV :+NPV :-NPV :+NPV :-NPV
0 -$30.00 19% 21% 1.00 1.00 -$30.00 -30.00
1 $5.00 19% 21% 1.19 1.21 $4.20 =5/1.19 4.13=5/1.21
2 $10.00 19% 21% 1.42 1.46 $7.06 6.83
3 $15.00 19% 21% 1.69 1.77 $8.90 8.47
4 $20.00 19% 21% 2.01 2.14 $9.97 9.33
NPV $0.14 -$1.24
IRR 19.2% =19% + ((0.14/(0.14 + 1.24)) * (21% - 19%)

Project B
Discount ...

Solution Summary

The projects after-tax cash flows are examined.

$2.19