Reference no: EM132571774

You are a financial analyst for the Waffle Company. The director of capital budgeting has asked you to analyze two proposed capital investments, Projects A and B. Each project has a cost of $50,000, and the cost of capital for each is 10%.

The projects' expected net cash flows are as follows:

Expected Net Cash Flows

Year                    Project A                     Project B

0                       ($50,000)                ($50,000)

1                          25,000                       15,000

2                           20,000                       15,000

3                           10,000                       15,000

4                              5,000                    15,000

5                                  5,000                 15,000

Question 1: Calculate each project's payback period, net present value (NPV), internal rate of return (IRR), modified internal rate of return (MIRR), and profitability index (PI).

Question 2: Which project will you select if your decision was based solely on the project's payback period?

Question 3: Which project or projects should be accepted if they are independent?

Question 4: Which project should be accepted if they are mutually exclusive?

Question 5: How might a change in the cost of capital produce a conflict between the NPV and IRR rankings of these two projects? Would this conflict exist if r were 6%? (Hint: Plot the NPV profiles.)