Chapter 4 Building Model

In: Business and Management

Submitted By bxbeemon
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Gardial Fisheries is considering two mutually exclusive investments. The projects' expected net cash flows are as follows: Expected Net Cash Flows Time 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?"

@ 12% cost of capital @ 18% cost of capital Use Excel's NPV function as explained in this chapter's Tool Kit. Note that the range does not include the costs, which are added separately.
WACC = 12% WACC = 18% NPV A = $226.96 NPV A = $18.24 NPV B = $206.17 NPV B = $89.54 At a cost of capital of 12%, Project A should be selected. However, if the cost of capital rises to 18%, then the choice is reversed, and Project B should be accepted.

b. Construct NPV profiles for Projects A and B. Before we can graph the NPV profiles for these projects, we must create a data table of project NPVs relative to differing costs of capital.

Project A Project B $226.96 $206.17
0% $951.00 $565.00
2% $790.31 $489.27
4% $648.61 $421.01
6% $523.41 $359.29
8% $412.58 $303.35
10% $314.28 $252.50
12% $226.96 $206.17
14% $149.27 $163.85
16% $80.03 $125.10
18% $18.24 $89.54
20% ($36.98) $56.85
22% ($86.39) $26.71
24% ($130.65) ($1.11)
26% ($170.34) ($26.85)…...

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