Copy of Ch10 Tool Kit

Copy of Ch10 Tool Kit - Panel A: Project Cash Flows and...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Panel A: Project Cash Flows and Cost of Capital Project cost of capital, r, for each project: 10% Initial Cost 1 2 3 4 Project S- $ 1 0 ,0 $ 5 ,0 $ 4 ,0 $ 3 ,0 $ 1 ,0 Project L- $ 1 0 ,0 $ 1 ,0 $ 3 ,0 $ 4 ,0 $ 6 ,7 5 0 Panel B: Summary of Selected Evaluation Criteria Project S Project L NPV $78 .20 $1,0 4.03 IRR 14.49% 13.5 % MIRR 12.1 % 12.6 % PI 1.08 1.10 Payback 3.30 Discounted Payback 2.95 3.78 Figure 10-2. Finding the NPV for Projects S and L r = 10% Year = 1 2 3 4 Project S-10,0 0.0 5,0 0 4,0 0 3,0 0 1,0 0 4,545.45 3,305.79 2,253.94 683.01 $78 .20 Long way: Sum the PVs of the CFs to find NPV Year = 1 2 3 4 Project L-10,0 0.0 1,0 0 3,0 0 4,0 0 6,750 $1,0 4.03 =N P V ( B5 1 ,C 6 2 :F 6 2 )+B6 2 Figure 10-3. Finding the IRR r = 14.49% Year = 1 2 3 4 Project S- 1 0 ,0 0 .0 5 ,0 4 ,0 3 ,0 1 ,0 4 ,3 6 7 .2 4 3 ,0 5 1 .6 4 1 ,9 9 .0 9 5 8 2 .0 3 S u m o f P V s = $ 0 .0 = N P V a t r = 1 4 .4 8 9 % . N P V = 0 , so I R = 1 4 .4 8 9 % . 1 4 .4 9 % = I R ( B 9 0 : F 9 0 ) u sin g I R fu n c t io n Year = 1 2 3 4 Project L- 1 0 ,0 0 .0 1 ,0 3 ,0 4 ,0 6 ,7 5 0 1 3 .5 % = I R ( B 1 0 : F 1 0 ) u sin g I R fu n c t io n Figure 10-4. Graph for Multiple IRRs: Project M (Mil ions of Dol ars) Year = 1 2 Project M- 1 .6 0 1 0- 1 0 r = 10% NPV =-$0.7 4 Note: r NPV 0%-$1.60 10%-$0.7 4 25% $0.0 0 = IRR #1 = 25% 1 0% $0.894 40 % $0.0 0 = IRR #2 = 40 % 50 %-$0.21 MODIFIED INTERNAL RATE OF RETURN, MIRR (Section 10.6) Figure 10-5. Finding the MIRR for Projects S and L r = 1 0 % Year = 1 2 3 4 Project S- 1 0 ,0 5 ,0 4 ,0 3 ,0 1 ,0 $ 3 ,3 0 $ 4 ,8 4 0 $ 6 ,6 5- 1 0 ,0 T e rm in a l V a lu e ( T V ) = $ 1 5 ,7 9 5 1 2 .1 % = R A T E ( F 2 0 8 ,0 ,B 2 0 9 ,F 2 1 3 ) 1 2 .1 % = M I R ( B 2 0 9 : F 2 0 9 ,B 2 0 6 ,B 2 0 6 ) 1 2 .1 % Year = 1 2 3 4 Project L- 1 0 ,0 1 ,0 3 ,0 4 ,0 6 ,7 5 0 For Project L, using the MIRR function: = M I R ( B 2 0 : F 2 0 ,B 2 0 6 ,B 2 0 6 ) = 1 2 .6 % Notes: NPV PROFILES (Section 10.7) Figure 10-6. NPV Profile for Project S C o st o f c a p it a l = 1 0 .0 % Year = 1 2 3 4 Project S- 1 0 ,0 0 .0 5 ,0 4 ,0 3 ,0 1 ,0 r 0 % $ 3 ,0 0 .0 5 % 1 ,8 0 4 .2 4 1 0 % 7 8 .2 0 1 4 .4 8 9 % 0 .0 N P V = $ 0 , so I R = 1 4 .4 8 9 % 1 5 %- 8 3 .3 0 2 0 %- 8 3 7 .1 9 The Cros over Rate Year = 1 2 3 4 Project S- $ 1 0 ,0 $ 5 ,0 $ 4 ,0 $ 3 ,0 $ 1 ,0 Project L- 1 0 ,0 1 ,0 3 ,0 4 ,0 6 ,7 5 0 $ 0 $ 4 ,0 $ 1 ,0- $ 1 ,0- $ 5 ,7 5 0 1 .975% Figure 10-7. NPV Profiles for Projects S and L: Shows Why Conflict Oc urs C o st o f C a p it a l 0 % $ 3 ,0 0 .0 $ 4 ,7 5 0 .0 5 % 1 ,8 0 4 .2 4 2 ,6 8 2 .0 6 1 0 % 7 8 .2 0 1 ,0 4 .0 3 C ro s o v e r = 1 .9 7 5 % 4 2 8 .3 8 4 2 8 .3 8 1 3 .5 4 9 % 1 5 6 .4 0 0 .0 1 4 .4 8 9 % 0 .0- 2 4 3 .6 5 2 0 %- $ 8 3 7 .1 9- $ 1 ,5 1 3 .3 1 Figure 10-8. Profitability Index (PI) PV of future cash flows Initial cost $10,78 .20 $10,0 0 1.078 PV of future cash flows Initial cost $1 ,0 4.03 $10,0 0 1.10 4 Notes: 2. PI and NPV rankings wil be consistent if the projects have the same cost, as is true for S and L....
View Full Document

Ask a homework question - tutors are online