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# Tut08q - Strictly for course AB102(2009 internal...

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Sept 13, 2009 Strictly for course AB102 (2009) internal circulation only. Nanyang Business School AB102 Financial Management Tutorial 8: The Basics of Capital Budgeting (Common Questions) 1) (11-23) 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: YEAR PROJECT A PROJECT B 0 -\$30 -\$30 1 5 \$20 2 10 10 3 15 8 4 20 6 a) 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 independent projects 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

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Tut08q - Strictly for course AB102(2009 internal...

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