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
a. Calculate NPV, IRR, MIRR, payback, and discounted payback for each project.
b. Assuming the projects are independent, which one(s) would you recommend?
If the projects are mutually exclusive, which would you recommend?
Notice that the projects have the same cash flow timing pattern. Why is there a
conflict between NPV and IRR?
11-8 CAPITAL BUDGETING CRITERIA: ETHICAL CONSIDERATIONS A mining
company is considering a new project. Because the mine has received a permit, the
project would be legal; but it would cause significant harm to a nearby river. The firm
could spend an additional $10 million at Year 0 to mitigate the environmental problem,
but it would not be required to do so. Developing the mine (without mitigation) would
cost $60 million, and the expected cash inflows would be $20 million per year for 5
years. If the firm does invest in mitigation, the annual inflows would be $21 million. The
risk-adjusted WACC is 12%.
Calculate the NPV and IRR with and without mitigation.