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1) You are considering the following two mutually exclusive projects
1) You are considering the following two mutually exclusive projects. The required rate of return is 8% for project ABC and 10% for project XYZ.
Year Project ABC Project XYZ
0 -500000 -800000
1 300,000 500,000
2 150,000 250,000
3 100,000 200,000
a) Based on the net present value method of analysis and given the information in the problem, which project you would should? Show your calculation.
b) Required payback period 2 year and 5 months for both Project ABC and XYZ, which project should you accept and why?
2) Based on the cash flows shown below, compute the IRR and MIRR for Project Erie. Suppose that the appropriate cost of capital is 12 percent. Advise the organization about whether they should accept or reject the project. Time (T); Cash Flow (CF)
(T) (CF)
0 - -12,000
1 - 2,360
2 - 4,390
3 - 1,520
4 - 980
5 - 1,250
Expert Solution
1-a) NPV of project ABC = -$14,238.18
NPV of project XYZ = $11,419.98
The project ABC has negative NPV so it should be rejected and the project XYZ should accepted because it has positive NPV.
b) Payback period for project ABC = 2.50 years Or 2 years 6 months
Payback period for project XYZ = 2.25 years Or 2 years 3 months
The project XYZ should be accepted because it has lower payback period than required payback period (2 years 5 months)
2) IRR of the project = -5.19%
MIRR of the project = 3.33%
The project should be rejected because the IRR is negative and the MIRR is lower than the cost of capital.
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