1. The company you work for is considering two projects, with the following cash flows. The company’s WACC is 14% Year 0 1 2 3 4 5
Project A -$9,000 $5,000 $3,000 $2,000 $1,000 $1,000
Project B -$9,000 $2,000 $3,000 $5,000 $1,000 $1,000 a.
What are NPV and IRR for each project?
b. Which project(s) should your company do, if the projects are mutually exclusive? Why?
c. Which project(s) should your company do, if the projects are independent? Why?
d. If the discount rate is 11%, would your answer change for b? for c? Why?
2. If the discount rate for a project’s incremental cash flow stream is equal to the Internal Rate of Return, what is the Net Present Value of that project?
3. If a project you are evaluating is more risky than average for your company, should you use WACC as your discount rate, adjust WACC up, or adjust WACC down? 4. Which of the following projects produce the largest NPV when a high discount rate is used?
a. Those projects that have large cash inflows in earlier years
b. Those projects that have large cash inflows in later years
c. Those projects that have large cash inflows are evenly distributed throughout the life of the investment
d. The acceptability of an investment is not affected by discount rates