SPREADSHEET PROBLEM

(10-23)

Build a Model: Capital

Budgeting Tools

Start with the partial model in the file Ch10 P23 Build a Model.xls on the textbook’s

Web site.Gardial Fisheries is considering two mutually exclusive investments. The

projects’ expected net cash flows are as follows:

Expected Net Cash Flows

Year Project A Project B

0 -$375 −$575

1 −300 190

2 −200 190

3 −100 190

4 600 190

5 600 190

6 926 190

7 −200 0

a. If each project’s cost of capital is 12%, which project should be selected? If the

cost of capital is 18%, what project is the proper choice?

b. Construct NPV profiles for Projects A and B.

c. What is each project’s IRR?

d. What is the crossover rate, and what is its significance?

e. What is each project’s MIRR at a cost of capital of 12%? At r = 18%?

(Hint: Consider Period 7 as the end of Project B’s life.)

f. What is the regular payback period for these two projects?

g. At a cost of capital of 12%, what is the discounted payback period for these two

projects?

h. What is the profitability index for each project if the cost of capital