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Computing NPV, IRR and MIRR and deciding on project acceptance or rejection

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** Please see the attached file for the complete problem description **

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Problem 1
Suppose a company is considering two independent projects, Project A and Project B. The cash outlay for Project A is $14,000. The cash outlay for Project B is $20,000. The company's cost of capital is 12%. The following table shows the after-tax cash flows. For each project, compute the NPV, the IRR, the MIRR, and indicate the accept/reject decision.
Year
Project A Project B
(please see the attached file)

Problem 2
Suppose a company is considering two investment projects. Both projects require an upfront expenditure of $30 million. The company estimates that the cost of capital is 10% and that the investments will result in the following after-tax cash flows (in millions of dollars). Complete parts (a) through (e) below.

Year
Project A Project B
(please see the attached file)

a) Find the regular payback period for each project.
b) Find the discounted payback period for each project.
c) Assume that the two projects are independent and the cost of capital is 10%. Which project or projects should the company undertake? Base your results on the NPV.
d) Assume that the two projects are mutually exclusive and the cost of capital is 5%. Which project or projects should the company undertake? Base your results on the MIRR.
e) Explain why quantitative measures may not always be the best way to evaluate a project.

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Solution Summary

In this solution we compute the NPV, IRR and MIRR of a project and decide on the acceptance or rejection of the project based on these findings.

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** please see the attached file for an Excel formatted solution **

Answer 1

Year Project A Project B
0 ($14,000) ($20,000)
1 $4,800 $6,700
2 $4,800 $6,700
3 $4,800 $6,700
4 $4,800 $6,700

NPV $579.28 $350.24

IRR 13.95% 12.83%

MIRR 13.14% 12.49%

Project A should be accepted as the NPV of this project is higher and also the IRR rate is better than project B

Answer 2
Year Project ...

Solution provided by:
Sonia Agarwal, CA
Education
  • Chartered Accountant (Equivalent to CPA in US), Institute of Charted Accountants of India
  • Bachelor of Commerce, West Bengal University
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