Fitch Industries is in the process of choosing the better of two equal-risk, mutually exclusive

capital expenditure projects- M and N. The relevant cash flows for each project are shown in the
following table. The firm’s cost of capital is 14%

Project M Project N
Initial Investment (CF0): $28,500 $27,000

Year (t) Cash Inflows (CF1)

1 $10,000 $11,000
2 $10,000 $10,000
3 $10,000 $9,000
4 $10,000 $8,000

a.) Calculate each project’s payback period.

Project M: $28,500 / $10,000 = 2.85 years

Project N: 2 + [($27,000 - $21,000) / $9,000] = 2.67 years

b.) Calculate the net present value (NPV) for each project.

Project M: $10,000 * PVIFA14%, 4 years - $28,500

= ($10,000 * 2.914) - $28,500 = $640

Project N:

PV = CFt *
Year CFt PVIF (14%) PVIF
1 $11,000 0.877 $9,647
2 10,000 0.769 $7,690
3 9,000 0.675 $6,075
4 8,000 0.592 $4,736

PV (Cash inflows) $28,148

Initial investment 27,000
NPV $1,148

c.) Calculate the internal rate of return (IRR) and (MIRR) for each project.

Discount Rate NPV NPV (N)

 (%) (M)
0 $11,500 $11,000
5 6,960 6,903
10 3,199 3,490
15 50 618
16 -518 99

Project M:
IRR  15.086%

Project N:
IRR  16.1935%

d.) Summarize the preferences dictated by each measure you calculated, and indicate which
project you would recommend. Explain why.

M N
Payback Period 2.85 yrs. 2.67 yrs.
NPV $637 $1,155
IRR 15.1% 16.2%

Project N would be recommended due to the following factors:

(1) higher NPV; (2) shorter payback period; (3) higher IRR. NPV has much “higher
power” than IRR, since it ranks Capital Budgeting ranks.

e.) Draw the net present value profiles for these projects on the same set of axes, and explain
the circumstances under which a conflict in rankings might exist.