Copperbelt University

Directorate of Distance Education and Open Learning

Assignment 4

Anthony Singogo

SIN: 22900601

Master’s in business administration (General)

GBS 621: Corporate Finance

Dr. Izidin El Kalak

2023-11-14
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Assignment

Your division is considering two investment projects, each of which requires an up-front

expenditure of $25 million. You estimate that the cost of capital is 10% and that the

investments will produce the following after-tax cash flows (in millions of dollars):

Year Project A Project B

1 5 20

2 10 10

3 15 8

4 20 6

1. What is the regular payback period for each of the projects?

Payback = number of unrecovered cost

Years prior to + at start of year
Full recovery Cash flow during the recovery year

Payback

Project A
Year 0 1 2 3 4
Cashflow $ (25.00) $ 5.00 $ 10.00 $ 15.00 $ 20.00
Cumulative
CF $ (25.00) $ (20.00) $ (10.00) $ 5.00 $ 25.00
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Assignment

Payback=2+10/15

2.67 Years 2.67 Years

Project B

Year 0 1 2 3 4

Cashflow $ (25.00) $ 20.00 $ 10.00 $ 8.00 $ 6.00

Cumulative

CF $ (25.00) $ (5.00) $ 5.00 $ 13.00 $ 19.00

Payback=1+5/10

1.5 Years 1.5 Years

Recommendation: with a regular payback evaluation Project B with 1 year and 6

Months would be selected as opposed to Project A with a 2.67 Year.

2. What is the discounted payback period for each of the projects?

Payback

Project A

Year 0 1 2 3 4

Cashflow $ (25.00) $ 5.00 $ 10.00 $ 15.00 $ 20.00

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Assignment

Discounted CF $ (25.00) $ 4.55 $ 8.26 $ 11.27 $ 13.66

Cumulative Discounted

CF $ (25.00) $ (20.45) $ (12.19) $ (0.92) $ 12.74

Payback=3+$0.92/13.66

3.07 Years 3.07 Years

Project B

Year 0 1 2 3 4

Cashflow $ (25.00) $ 20.00 $ 10.00 $ 8.00 $ 6.00

Discounted CF $ (25.00) $ 18.18 $ 8.26 $ 6.01 $ 4.10

Cumulative Discounted

CF $ (25.00) $ (6.82) $ 1.45 $ 7.46 $ 11.55

Payback=1+$6.82/8.26

1.83 Years $ 1.83 Years

Using discounted cash flows, Project B maintains the shorter payback period, hence if

Project A and B mutually exclusive Project B would be selected over Project A.

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Assignment
3. If the two projects are independent and the cost of capital is 10%, which

project or projects should the firm undertake?

Project A

Year 0 1 2 3 4

Initial outlay (25.00)

Cash flow after tax 5.00 10.00 15.00 20.00

Cost of Capital 10%

PV 4.55 8.26 11.27 13.66

SUM OF PV 37.74

INITIAL OUTLAY (25.00)

PV 12.74

Project B

Year 0 1 2 3 4

Initial outlay (25.00)

Cash flow 20.00 10.00 8.00 6.00

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Assignment
Cost of Capital 10%

PV 18.18 8.26 6.01 4.10

SUM OF PV 36.55

INITIAL OUTLAY (25.00)

PV 11.55

If the two Projects are independent the firm should undertake both Project A and Project

B because NPV for both Projects exceed zero or they all have a positive NPV.

4. If the two projects are mutually exclusive and the cost of capital is 5%, which

project should the firm undertake?

Project A

Year 0 1 2 3 4

Initial outlay (25.00)

Cash flow after tax 5.00 10.00 15.00 20.00

Cost of Capital 5%

PV 4.76 9.07 12.958 16.454

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Assignment
SUM OF PV 43.24

INITIAL OUTLAY (25.00)

PV 18.24

Project B

Year 0 1 2 3 4

Initial outlay (25.00)

Cash flow 20.00 10.00 8.00 6.00

Cost of Capital 5%

PV 19.05 9.07 6.91 4.94

SUM OF PV 39.96

INITIAL OUTLAY (25.00)

PV 14.96

Provided that Project A and Project B are mutually exclusive, then the firm should a

project with a higher NPV, in this case it is Project A.

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Assignment
5. If the two projects are mutually exclusive and the cost of capital is 15%, which

project should the firm undertake?

Project A

Year 0 1 2 3 4

Initial outlay (25.00)

Cash flow after tax 5.00 10.00 15.00 20.00

Cost of Capital 15%

PV 4.35 7.56 9.863 11.435

SUM OF PV 33.21

INITIAL OUTLAY (25.00)

PV 8.21

Project B

Year 0 1 2 3 4

Initial outlay (25.00)

Cash flow 20.00 10.00 8.00 6.00

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Assignment
Cost of Capital 15%

PV 17.39 7.56 5.26 3.43

SUM OF PV 33.64

INITIAL OUTLAY (25.00)

PV 8.64

The firm is recommended to undertake Project B with NPV 8.64 higher than NPV 8.21

for Project A.

6. What is the crossover rate?

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Assignment
NPV Profile
Discount rate NPV of A NPV of B

0.00 25.00 25.00

0.05 18.24 14.96

0.10 12.74 11.55

0.15 8.21 8.64

0.20 4.44 6.13

0.25 1.27 3.95

0.30 (1.41) 2.04

NPV PROFILE
30.00
25.00
20.00
15.00
NPV

10.00
5.00
-
(5.00) 0.00 0.05 0.10 0.15 0.20 0.25 0.30
Discount rate

NPV of A NPV of B

Using the graph, the crossover rate is 12.4%

7. If the cost of capital is 10%, what is the modified IRR (MIRR) of each project?

At 10% cost of capital. Using excel Project A MIRR= (C6:G7, B8, B8) = 22%
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Assignment

At 10% cost of capital. Using excel Project B MIRR= (C17:G18, B19, B19) = 21%

References

Ehrhardt, M. (2017). Corporate finance: A focused approach (6th Ed.). Boston, MA:

Cengage Learning. ISBN 9781305637108.

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Assignment