AB1201 Tutorial 8 - Strictly for course AB1201 internal...

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Contemporary Project Management
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Chapter 10 / Exercise 5
Contemporary Project Management
Kloppenborg
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Strictly for course AB1201 internal circulation only.Nanyang Business SchoolAB1201 Financial ManagementTutorial 8: The Basics of Capital Budgeting(Common Questions)Questions 2 to 5 will be presented by students while Question 1 will be presented by instructors.1) Capital budgeting criteria. Your division is considering two projects. Its WACC is 10 percent,and the project’s after-tax cash flows (in millions of dollars) would be:YEARPROJECT APROJECT B0-$30-$3015$202101031584206a) Calculate the project’s NPVs, IRRs, MIRRs, regular paybacks and discounted paybacks.b) If the two projects are independent, which project(s) should be chosen?c) If the two projects are mutually exclusive and the WACC is 10 percent, which project should be chosen?d) Plot NPV profiles for the two projects. Identify the projects’ IRRs on the graph.e) If the WACC were 5 percent, would this change your recommendation if the projects were mutually exclusive? If the WACC were 15 percent, would this change your recommendation? Explain your answers.f) The “crossover rate” is 13.5252 percent. Explain in words what this rate is and how it affects the choice between mutually exclusive projects.g) Is it possible for conflicts to exist between the NPV and the IRR when independentprojects are being evaluated? Explain your answer.h) Now, just look at the regular and discounted paybacks. Which project looks better when judged by the paybacks?i)If the payback were the only method a firm used to accept or reject projects, what payback should it choose as the cutoff point, that is, reject projects if their payouts are not below the chosen cutoff?
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Contemporary Project Management
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Chapter 10 / Exercise 5
Contemporary Project Management
Kloppenborg
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