MGT 326 HW 5

1

1. What is the Discounted Payback Period of a project with the cash flows depicted below? The firm’s WACC is 5.8%4.875

0 4 5 61 2 3

$50k

$370k

$89k$130k

$145k$170k

$94k

2. What is the NPV of the above project? The firm’s WACC is 5.8% $83.01

MGT 326 HW 5 Solution

3. A firm is considering two mutually exclusive projects that have the annual cash flows shown below. Based on NPV analysis, which project should be accepted? The required rate of return is 7.0000%

Year 0 1 2 3 4 5 6Project A CFs -$60.00 $18.00 $18.00 $18.00 $18.00 $18.00 $18.00

Project B CFs -$45.00 $30.00 $30.00  

NPVA = $25.80 Accept Project A; highest NPVNPVB = $24.36

4. A firm is considering two mutually exclusive projects that have the annual cash flows shown below. Project A is a moderately risky project while Project B is considered to have a high degree of risk. The firm’s WACC is 7.34%. The firm uses the risk-adjusted discount rate method to account for project risk. Projects posing minimal risk are evaluated using WACC for the discount rate. Using the WACC as a base, 1.25% is added for moderately risky projects and 2.50% is added for significantly risky projects. The NPV of Project A is: -$13.86 The NPV of Project B is: -$32.18

Year Proj A Proj B

0 -$215.00 -$295.00

1 $65.00 $57.00

2 $63.00 $75.00

3 $60.00 $97.00

4 $57.00 $110.00

Which project should be adopted?