Problem:
Your division is considering two investment projects, each of which requires an up-front expenditure of $24 million. You estimate that the cost of capital is 8% and that the investments will produce the following after-tax cash flows (in millions of dollars): Project A year 1 = 5, year 2 = 10, year 3= 15, year 4 = 20. Project B year 1 = 20, year 2 = 10, year 3 = 8, year 4= 6
Required:
Question 1: What is the regular payback period for each of the projects (years)?
Question 2: What is the discounted payback period for each of the projects (years)?
Question 3: What is the crossover rate?
Question 4: If the cost of capital is 8%, what is the modified IRR (MIRR) of each project?
Please justify your answer and also describe all workings.