FINANCIAL MANAGEMENT (FIN5FMA), SEMESTER 1, 20
15
– SOLUTIONS TO
ASSIGNED QUESTIONS FOR TUTORIAL 3
Chapter 11
Problem 11-7 (Capital budgeting criteria)
A firm with a 14% WACC is evaluating two projects for this year’s capital budget.
After-tax cash flows, including depreciation, are as follows:
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Project A
-$6,000
$2,000
$2,000
$2,000
$2,000
$2,000
Project B
-$18,000
$5,600
$5,600
$5,600
$5,600
$5,600
a) Calculate NPV, IRR, MIRR, payback, and discounted payback for each project.

Modified IRR (MIRR) calculations:
Future value of cash flows re-invested at the WACC of 14%:
Year 1 CF = $5,600(1.14)
4
= $9,458.18
Year 2 CF = $5,600(1.14)
3
= $8,296.65
Year 3 CF = $5,600(1.14)
2
= $7,277.76
Year 4 CF = $5,600(1.14)
1
= $6,384.00
Year 5 CF = $5,600
Terminal value = $37,016.59
PV of Project cost = $18,000
$18,000 = $37,016.59 / (1 + MIRR)
5
MIRR = 0.1551 (15.51%)
Payback period = $18,000 / $5,600 = 3.21 years
Discounted payback period calculations:
Year 1 discounted CF = $5,600 / 1.14 = $4,912.28
Year 2 discounted CF = $5,600 / (1.14)
2
= $4,309.02
Year 3 discounted CF = $5,600 / (1.14)
3
= $3,779.84
Year 4 discounted CF = $5,600 / (1.14)
4
= $3,315.65
Year 5 discounted CF = $5,600 / (1.14)
5
= $2,908.46
Discounted payback period = 4 + ($1,683.21/$2,908.46) = 4.58 years
b) Assuming the projects are independent, which one(s) would you recommend?

c) If the projects are mutually exclusive, which would you recommend?