Question

Consider the following cash flows of two projects for Fontana Rubber Parts Company. Assume the discount rate for Fontana Rubber Parts is 14%.

Year Dry Prepreg Solvent Prepreg.
0 -$30,000 -$90,000
1 10,000 28,000
2 10,000 28,000
3 10,000 28,000
4 10,000 28,000
5 10,000 28,000
a. Calculate NPV, IRR, MIRR, payback, and discounted payback for each project
b. Assuming the projects are independent, which one(s) would you recommend?
c. If the projects are mutually exclusive, which would you recommend?

Answer 1

Year Dry Prepreg discounted cash flow

0 -$30,000 -$30,000

1 10,000 8,772

2 10,000 7,695

3 10,000 6,750

4 10,000 5,921

5 10,000 5,194

Year Solvent Prepreg. discounted cash flow

0 -$90,000 -$90,000

1 28,000 24,561

2 28,000 21,545

3 28,000 18,899

4 28,000 16,578

5 28,000 14,542

a. Calculate NPV, IRR, MIRR, payback, and discounted payback for each project

Dry Prepreg

NPV = $4,330

IRR = 19.86%

MIRR = 17.12%

payback = 3 years

discounted payback = 4.17 years

Solvent Prepreg

NPV = $6,130

IRR = 16.80%

MIRR = 15.51%

payback = 3.21 years

discounted payback = 4.58 years

b. Assuming the projects are independent, which one(s) would you recommend?

• both projects, since their NPV is positive

c. If the projects are mutually exclusive, which would you recommend?

Dry prepreg becuase its IRR, MIRR are higher, and its payback and discounted payback periods are shorter.