Question 1. If two mutually exclusive projects were being compared, would a high cost of capital favor the longer-term or the shorter-term project? Why? If the cost of capital declined, would that lead firms to invest more in longer-term projects or shorter-term projects? Would a decline (or increase) in the WACC cause changes in the IRR ranking of mutually exclusive projects?
Question 2. Capital Budgeting criteria- A firm with a 14 percent WACC is evaluating two projects for this year’s capital budget. After-tax cash flows, including depreciation, are as follows:
0 1 2 3 4 5
Project A -$6000 $2000 $2000 $2000 $2000 $2000
Project B -$18,000 $5,600 $5,600 $5,600 $5,600 $5,600
a. Calculate NPV, IRR, MIRR, payback, and discounted payback for each project.
b. Assuming the projects are independent, which one or ones would you recommend?
c. If the projects are mutually exclusive, which would you recommend?
d. Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRR?