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1. A firm is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The cash flows are presented below:
WACC:
6.75%
0
1
2
3
4
CFS
-$1,025
$380
$380
$380
$380
CFL
-$2,150
$765
$765
$765
$765
Calculate NPV for both projects.
Calculate IRR for both projects.
If these projects are mutually exclusive projects, which investment should you invest and why?
2.Boca Raton Stake House is now considering expanding the business. Bob Correll, the owner and CEO, of the company is facing a difficulty which projects he should invest. The projects are:
Project
CF0
CF1
CF2
CF3
CF4
CF5
WACC
Frozen Yogurt
($1,000)
$180
$200
$220
$230
$250
8.50%
Jewelry
($5,500)
$1,200
$1,400
$1,600
$1,800
$2,000
12.50%
Soft Drink
($3,000)
$1,000
$900
$700
$600
$500
10%
Farming
($7,800)
$4,000
$3,200
$2,400
$1,600
$800
15%
Note: All the number is in thousand (,000)
Before deciding, he wanted to know the return in both dollar value and percentage.
Calculate NPV for these projects.
Calculate IRR for these projects.
Why WACC for each project is different? Explain.
If these projects are independent projects, which project should he invest?
If these projects are mutually exclusive projects, which project should he invest?
3.
Discuss the differences between NPV and IRR. By the rule of thumb, which method is better? Explain.
4. Why some managers are willing to take on negative NPV projects? Explain.
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