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Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis
Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flow! are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-yea lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 9%.
0
1 2 3 4
Project A -900 700 410 260 310 Project B -900 300 345 410 760
What is Project A's payback? Do not round intermediate calculations. Round your answer to four decimal places.
Ir— years
What is Project A's discounted payback? Do not round intermediate calculations. Round your answer to four decimal places.
years
What is Project B's payback? Do not round intermediate calculations. Round your answer to four decimal places.
L
years
What is Project B's discounted payback? Do not round intermediate calculations. Round your answer to four decimal places.
L years
Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 9%.
Project A -1,300 Project B -1,300 0 640 240 1 310 245 2 280 430 3 400 850 4
What is Project A's IRR? Do not round intermediate calculations. Round your answer to two decimal places.
0/0
What is Project B's IRR? Do not round intermediate calculations. Round your answer to two decimal places.
0,0 L If the projects were independent, which project(s) would be accepted according to the IRR method? [ -Select- v If the projects were mutually exclusive, which project(s) would be accepted according to the IRR method? [-Select- v
Could there be a conflict with project acceptance between the NPV and IRR approaches when projects are mutually exclusive?
-Select- v
The reason is
-Select--
Reinvestment at the
-Select- v
is the superior assumption, so when mutually exclusive projects are evaluated the
-Select- v
V
approach should be used for the capital budgeting decision.
Expert Solution
1.
Project A's Payback Period = 1.4878 Years
Project A's Discounted Payback Period = 1.7470 Years
Project B's Payback Period = 2.6220 Years
Project B's Discounted Payback Period = 3.0331 Years
2.
Project A's IRR = 10.86%
Project B's IRR = 10.69%
If the projects are independednt, Select both projects A and B as IRR is greater than WACC.
If the projects are mutually exclusive, Select Project A as IRR is higher for Project A.
Yes, there could be a conflict with project acceptance when projects are mutually exclusive.
The reason is the NPV and IRR approaches use different reinvestment rate assumptions so there can be a conflict in project acceptance when mutually exclusive projects are considered.
Reinvestment at WACC is the superior assumption, so when mutually exclusive projects are evaluated the NPV approach should be used for the capital budgeting decision.
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