2
8.9 Mutually Exclusive Projects
3.
Conglomerate Inc. is considering two mutually exclusive projects with the following
estimated year-end cash flows:
Year
Project A
Project B
0
-$350,000
-$350,000
1
90,000
170,000
2
110,000
150,000
3
140,000
120,000
4
210,000
100,000
The firm’s cost of capital is 15% and the firm expects to reinvest any cash inflows at this
rate. Management set the maximum payback period at 3 years and the maximum
discounted payback period at 3.5 years. Using each of the follow techniques, which project
is preferable? Why?
A. Net present value
B. Profitability index
C. Internal rate of return
D. Modified internal rate of return
E. Payback period
F. Discounted payback period
4.
Waldorf Suppliers is evaluating two mutually exclusive machines -- Model 300 or Model
100. The firm requires an 11% rate of return and has sufficient financing to undertake
either project. Analysts had done some preliminary analysis of these two projects as
shown below.
Mutually Exclusive Projects – Model 100 and Model 300
Year
Model 300
Rank
Model 100
Rank
0
-$350,000
-$200,000
1
120,000
70,000
2
120,000
70,000
3
120,000
70,000
4
120,000
70,000
NPV @ 11%
$22,293
1
$17,171
2
PI
$1.06
2
$1.09
1
IRR
13.95%
2
14.96%
1
MIRR @ 11%
12.73%
2
13.31%
1
A. Why does a conflict exist between the rankings or Model 300 and Model 100?
B. Based solely on the information provided, which project is preferable? Why?
5.
Dyna Corp. can undertake one of two mutually exclusive projects – Project X or Project Y.