[ad_1]
Case 1:
Maine Company is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and are not repeatable.
WACC: 7.75%
Year 0 1 2 3 4
CFS −$2,000 $1,500 $1,200
CFL −$2,000 $800 $800 $800 $800
Answer the following questions:
- Calculate NPV, IRR, and MIRR for Project S and L. (Please copy and paste your excel function in here as your work detail).
- If the decision is made by choosing the project with the higher IRR, how much value will be forgone?
- Explain the underlying cause of ranking conflicts between NPV and IRR.
Case 2:
Bangor Moving Company is thinking of opening a new warehouse, and the key data are shown below. The company owns the building that would be used, and it could sell it for $100,000 after taxes if it decides not to open the new warehouse. The equipment for the project would be depreciated by the straight-line method over the project’s 3-year life, after which it would be worth nothing and thus it would have a zero salvage value. No new working capital would be required, and revenues and other operating costs would be constant over the project’s 3-year life. What is the project’s NPV? (Hint: Cash flows are constant in Years 1-3.)
You can work on this case in excel and copy your step-by-step answer here.
| Project cost of capital (r) | 10.0% |
| Opportunity cost | $100,000 |
| Net equipment cost (depreciable basis) | $65,000 |
| Straight-line deprec. rate for equipment | 33.333% |
| Sales revenues, each year | $123,000 |
| Operating costs (excl. deprec.), each year | $25,000 |
| Tax rate | 25% |
[ad_2]
Testimonials
