Lahore School of Economics

Financial Management II
The Basics of Capital Budgeting
Chapter 11
Assignment 2

Examples
1. You must analyze two projects, X and Y. Each project costs $10,000, and the firm’s WACC is 12%. The expected net
cash flows are as follows:

a. Calculate each project’s NPV, IRR, MIRR, payback, and discounted payback.
b. Which project(s) should be accepted if they are independent?
c. Which project(s) should be accepted if they are mutually exclusive?
d. What is the crossover rate?

2. Project X costs $1,000, and its cash flows are the same in Years 1 through 10. Its IRR is 12%, and its WACC is 10%.
What is the project’s MIRR?

3. A project has annual cash flows of $7,500 for the next 10 years and then $10,000 each year for the following 10 years.
The IRR of this 20-year project is 10.98%. If the firm’s WACC is 9%, what is the project’s NPV?

Problems for Assignment

1. Your division is considering two projects with the following net cash flows (in millions):

a. What are the projects’ NPVs assuming the WACC is 5%? 10%? 15%?
b. What are the projects’ IRRs?
c. If the WACC was 5% and A and B were mutually exclusive, which project would you choose? What if the WACC was
10%? 15%?
d. Find the MIRR of the two projects if WACC is 10%.

2. Your division is considering two investment projects, each of which requires an upfront expenditure of $25 million.
You estimate that the cost of capital is 10% and that the investments will produce the following after-tax cash flows:

a. What is the regular payback period for each of the projects?

b. What is the discounted payback period for each of the projects?
c. If the two projects are independent and the cost of capital is 10%, which project or projects should the firm undertake?
d. If the two projects are mutually exclusive and the cost of capital is 5%, which project should the firm undertake?
e. If the two projects are mutually exclusive and the cost of capital is 15%, which project should the firm undertake?
f. What is the crossover rate?
g. If the cost of capital is 10%, what is the modified IRR (MIRR) of each project?