You are a financial analyst for the Brittle Company. The director of capital budgeting has asked you to analyze two proposed capital investments: Projects X and Y. Each project has a cost of $10,000, and the cost of capital for each is 12%. The projects' expected net cash flows are shown in the table below.

Expected Net Cash Flows

Year Project X Project Y

0 -$10,000 -$10,000

1 6,500 3,500

2 3,000 3,500

3 3,000 3,500

4 1,000 3,500

 

1. Use the Homework Student Workbook to calculate each project's net present value (NPV), internal rate of return (IRR), modified internal rate of return (MIRR), and profitability index (PI).
2. Which project or projects should be accepted if they are independent?
3. Which project or projects should be accepted if they are mutually exclusive?

NPV

see the NPV below pictures attached for both project x and y in sequence.

IRR

Project x IRR. 18.03%

Project Y IRR. 14.96%

MIRR

Project X

The Finance Rate: 12.00%

The Reinvestment Rate: 10.00%

FV = + 6500 x (1 +0.1)3 + 3000 x (1 +0.1)2 + 3000 x (1 +0.1)1 + 1000 x (1 +0.1)0 = 16,581.50

PV = - 10000 = -10,000.00

MIRR = (16,581.50 / 10)1/4 - 1 = 13.48%

Project Y

The Finance Rate: 12.00%

The Reinvestment Rate: 10.00%

FV = + 3500 x (1 +0.1)3 + 3500 x (1 +0.1)2 + 3500 x (1 +0.1)1 + 3500 x (1 +0.1)0 = 16,243.50

PV = - 10000 = -10,000.00

MIRR = (16,243.50 / 10)1/4 - 1 = 12.89%

Profitability index

Project X

966.01/10000 = 0.0967

Project Y

630.72/10000 = 0.0631

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

If they are independent both should be selected as both has positive Net present value. Both projects has IRR above than required rate of return.

Which project or projects should be accepted if they are mutually exclusive?

If they are mutually exclusive then project X has a better value with same investment in project Y, as project X providing NPV of 966.01 and project Y providing NPV of 630.72 only. Also project X has higher IRR and PI as compared to Project Y. So project X should be selected with they are mutually exclusive.

please see the attached file for the complete solution.