Assume you are evaluating two mutually exclusive projects, the cash flows of which appear below and that your company uses a cost of capital of 13% to evaluate projects such as these. TimeProject A Cash FlowsProject B Cash Flows0-$46,800-$63,6001-21,60020,400243,20020,400343,20020,400443,20020,4005-28,80020,400 Calculate the payback period and discounted payback period for projects A & B.Calculate the IRR and MIRR of projects A & B. Assume a reinvestment rate of 13% for the calculation of MIRR.Sketch the NPV profile for projects A & B.Determine the crossover point for these projects’ NPV profiles.Assuming a cost of capital of 14%, which of these projects should be accepted?Under what conditions on the cost of capital should project B be preferred to project A?If Project A and Project B are independent, which project should be undertaken?

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Answered: Assume you are evaluating two mutually…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 13P

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Assume you are evaluating two mutually exclusive projects, the cash flows of which appear below and that your company uses a cost of capital of 13% to evaluate projects such as these.

Time	Project A Cash Flows	Project B Cash Flows
0	-$46,800	-$63,600
1	-21,600	20,400
2	43,200	20,400
3	43,200	20,400
4	43,200	20,400
5	-28,800	20,400

Calculate the payback period and discounted payback period for projects A & B.
Calculate the IRR and MIRR of projects A & B. Assume a reinvestment rate of 13% for the calculation of MIRR.
Sketch the NPV profile for projects A & B.
Determine the crossover point for these projects’ NPV profiles.
Assuming a cost of capital of 14%, which of these projects should be accepted?
Under what conditions on the cost of capital should project B be preferred to project A?
If Project A and Project B are independent, which project should be undertaken?

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