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

WACC = 12% WACC = 18%

NPV A = $226.96 NPV A = $18.24

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 NPV Profiles

$226.96 $206.17 $1,000
0% $951.00 $565.00
2% $790.31 $489.27
4% $648.61 $421.01
Project A
6% $523.41 $359.29 $675
8% $412.58 $303.35
10% $314.28 $252.50
12% $226.96 $206.17
14% $149.27 $163.85
NPV

$350
16% $80.03 $125.10
Project B
18% $18.24 $89.54
20% ($36.98) $56.85
22% ($86.39) $26.71
24% ($130.65) ($1.11) $25

26% ($170.34) ($26.85) -7% 0% 8% 15% 23% 30%

-$300
1
Cost of Capital
 $25
-7% 0% 8% 15% 23% 30%
28% ($205.97) ($50.72)
30% ($237.98) ($72.88)
-$300
c. What is each project's IRR?
Cost of Capital

Note in the graph above that the X-axis intercepts are equal to the two
IRR A = 18.64% projects' 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%
3 ($290)
4 $410
The crossover rate represents the cost of
5 $410
capital at which the two projects value, at
a cost of capital of 13.14% is:
have the same net present value. In this
6 $736 scenario, that common net present $182
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.

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

MIRR A = 15.43% MIRR A = 18.34%

MIRR B = 17.87% MIRR B = 20.88%

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 4.625

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%

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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 5.40

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%?

PV of future cash flows for A: $601.96

PI of A: 1.61

PV of future cash flows for B: $781.17

PI of B: 1.36

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ear project.

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