12-

CAPITAL BUDGETING CRITERIA

A firm with a 14% WACC is evaluating two projects for thisyear's capital budget. After-tax cash flows, includingdepreciation, are as follows:

0

1

2

3

4

5

Project M	-$15,000	$5,000	$5,000	$5,000	$5,000	$5,000
Project N	-$45,000	$14,000	$14,000	$14,000	$14,000	$14,000

1. Calculate NPV for each project. Round your answers to thenearest cent. Do not round your intermediate calculations.
   Project M    $
   Project N    $

   Calculate IRR for each project. Round your answers to twodecimal places. Do not round your intermediate calculations.
   Project M      %
   Project N      %

   Calculate MIRR for each project. Round your answers to twodecimal places. Do not round your intermediate calculations.
   Project M      %
   Project N      %

   Calculate payback for each project. Round your answers to twodecimal places. Do not round your intermediate calculations.
   Project M      years
   Project N      years

   Calculate discounted payback for each project. Round youranswers to two decimal places. Do not round your intermediatecalculations.
   Project M      years
   Project N      years

2. Assuming the projects are independent, which one(s) would yourecommend?
   -Select-Only Project M would be accepted because NPV(M) >NPV(N).Only Project N would be accepted because NPV(N) >NPV(M).Both projects would be accepted since both of their NPV'sare positive.Only Project M would be accepted because IRR(M) >IRR(N).Both projects would be rejected since both of their NPV'sare negative.Item 11
3. If the projects are mutually exclusive, which would yourecommend?
   -Select-If the projects are mutually exclusive, the project withthe highest positive NPV is chosen. Accept Project N.If theprojects are mutually exclusive, the project with the highestpositive IRR is chosen. Accept Project M.If the projects aremutually exclusive, the project with the highest positive MIRR ischosen. Accept Project M.If the projects are mutually exclusive,the project with the shortest Payback Period is chosen. AcceptProject M.If the projects are mutually exclusive, the project withthe highest positive IRR is chosen. Accept Project N.Item 12
4. Notice that the projects have the same cash flow timingpattern. Why is there a conflict between NPV and IRR?
   -Select-The conflict between NPV and IRR is due to the fact thatthe cash flows are in the form of an annuity.The conflict betweenNPV and IRR is due to the difference in the timing of the cashflows.There is no conflict between NPV and IRR.The conflict betweenNPV and IRR occurs due to the difference in the size of theprojects.The conflict between NPV and IRR is due to the relativelyhigh discount rate.Item 13