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# Gardial Fisheries is considering two mutually exclusive investments.

## The projects' expected net cash

flows are as follows:

## Expected Net Cash Flows

Time Project A Project B
0 (\$375) (\$575)
1 (\$300) \$190
2 (\$200) \$190
3 (\$100) \$190
4 \$600 \$190
5 \$600 \$190
6 \$926 \$190
7 (\$200) \$0

a. If each project's cost of capital is 12%, which project should be selected? If the cost of capital is
18%, what project is the proper choice?

## @ 12% cost of capital @ 18% cost of capital

Use Excel's NPV function as explained in
WACC = 12% WACC = 18% this chapter's Tool Kit. Note that the range
does not include the costs, which are added
NPV A = \$226.96 NPV A = \$18.24 separately.

## NPV B = \$206.17 NPV B = \$89.54

At a cost of capital of 12%, Project A should be selected. However, if the cost of capital rises to 18%,
then the choice is reversed, and Project B should be accepted.

## b. Construct NPV profiles for Projects A and B.

Before we can graph the NPV profiles for these projects, we must create a data table of project NPVs
relative to differing costs of capital.

Project A Project B
C
0% \$951.00 \$565.00
2% \$774.82 \$479.68 \$1,200.00
4% \$623.67 \$404.81
6% \$493.79 \$338.95 \$1,000.00
8% \$382.02 \$280.88 \$800.00
10% \$285.71 \$229.55
12% \$202.65 \$184.08 \$600.00
14% \$130.94 \$143.73
16% \$68.99 \$107.84 \$400.00
18% \$15.45 \$75.89
\$200.00
20% (\$30.82) \$47.37
22% (\$70.81) \$21.90 \$0.00
24% (\$105.36) (\$0.90) 0% 2% 4% 6% 8% 10% 1
26% (\$135.19) (\$21.31) (\$200.00)
28% (\$160.91) (\$39.62)
(\$400.00)
\$200.00

\$0.00
0% 2% 4% 6% 8% 10% 1
(\$200.00)

(\$400.00)
30% (\$183.06) (\$56.06)

## We find the internal rate of return with Excel's IRR function:

Note in the graph above that the X-axis intercepts are equal to the two projects'
IRR A = 18.64% IRRs.
IRR B = 23.92%

## d. What is the crossover rate, and what is its significance?

Cash flow
Time differential
0 \$200
1 (\$490)
2 (\$390) Crossover rate = 13.14%
The crossover rate represents the cost of
3 (\$290) capital at which the two projects value, at
4 \$410 a cost of capital of 13.14% is:
5 \$410 have the same net present value. In this
6 \$736 scenario, that common net present \$181.59
7 (\$200)

e. What is each project's MIRR at a cost of capital of 12%? At r = 18%? Hint: note that B is a 6-year project.

## MIRR A = 15.43% MIRR A = 18.34%

MIRR B = 17.01% MIRR B = 20.47%

## f. What is the regular payback period for these two projects?

Project A
Time period 0 1 2 3 4 5 6 7
Cash flow (375) (300) (200) (100) 600 \$600 \$926 (\$200)
Cumulative cash flow (375) (675) (875) (975) (375) 225 1,151 951
Payback 4.757

Project B
Time period 0 1 2 3 4 5 6 7
Cash flow (575) 190 190 190 190 \$190 \$190 \$0
Cumulative cash flow (575) (385) (195) (5) 185 375 565 565
Payback 3.026

g. At a cost of capital of 12%, what is the discounted payback period for these two projects?

WACC = 12%

Project A
Time period 0 1 2 3 4 5 6 7
Cash flow (375) (300) (200) (100) 600 \$600 \$926 (\$200)
Disc. cash flow 375 268 159 71 (381) (340) (469) 90
Disc. cum. cash flow 375 643 802 873 492 152 (317) (227)
Discounted Payback 5.32

Project B
Time period 0 1 2 3 4 5 6 7
Cash flow (575) 190 190 190 190 \$190 \$190 \$0
Disc. cash flow 575 (170) (151) (135) (121) (108) (96) 0
Disc. cum. cash flow 575 405 254 119 (2) (110) (206) (206)
Discounted Payback 3.98

h. What is the profitability index for each project if the cost of capital is 12%?

PI of A: 1.61

## PV of future cash flows for B: \$781.17

PI of B: 1.36
Chart Title

6% 8% 10% 12% 14% 16% 18% 20% 22% 24% 26% 28% 30%
6% 8% 10% 12% 14% 16% 18% 20% 22% 24% 26% 28% 30%

ar project.

MIRR
To calculate the MIRR,
Calculate the PV of Outflows: (npv(r%, cashflows even the zeros)
Calculate the PV of INflows: (npv(r%, cashflows even the zeros)
Calculate the FV of INflows: FV of the PV of Inflows at r%
Calculate MIRR which is I for PV = PV of Outflows, FV= FV of Inflows, PMT= 0
zeros)
ros)

f Inflows, PMT= 0